China top-performing market for venture capital returns, according to new eFront report
- China is the best performing market based on total value to paid-in measure, outpacing US
- Much of China’s value remains ‘unrealised’, report finds
China overtook the United States last year as the top performing market for venture capital returns, even as a trade war that has raged between Washington and Beijing for more than a year and a slowing economic environment have eaten into deal flow globally in the first nine months of this year.
In its new report released on Tuesday, eFront, a financial services software provider owned by BlackRock, said China was the top performing venture capital market globally, delivering a total value to paid-in (TVPI) of 1.72 times. TVPI measures invested capital in relation to the total amount of capital paid in to the fund to date.
“Much of that [China] value is unrealised,” Tarek Chouman, the eFront chief executive, said. “The Chinese market’s immaturity means that much of this value is effectively unproven.”
The US, the most mature leveraged buyout market in the world, had a TVPI of 1.63 times, according to eFront, which analysed data from 4,000 funds globally. Based on internal rate of return – another measure of performance – the US had a slight lead over China, according to eFront.
The findings come as deal flow this year fell by 10.3 per cent globally to US$2.82 trillion in the first nine months of the year, according to Refinitiv. Deal flow declined 21.5 per cent in China through September 30, according to the financial data provider.
The drop in deal flow came as the US and China have been locked in a trade war that has seen both countries put tariffs on hundreds of billions of dollars of each other’s goods. The uncertainty over trade policy, against the backdrop of slowing economies in the US and China, has weighed on business sentiment and caused some companies to delay future investment.
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“There’s definitely been a slowdown we’ve seen from our side on outbound M&A [from China],” David Cho, a partner at the law firm Dechert in Hong Kong. “Chinese companies are reluctant to go into the US, and the general uncertainty about the economy is also affecting their foray into other markets as well, extending beyond the US. It’s also creating some opportunities. Korean companies for example, I think are certainly facing less competition in terms of overseas assets, as well as Japanese companies who are looking buy companies overseas.”
Investment from the US into China also is down, Cho said, with colleagues who work on venture capital investments telling him both deal flow and fundraising have declined.
“There was a time when China spent a lot of money going outbound and then the government sort of reined it in and limited capital flow, restricting it to really highly important sectors, industries where foreign technology would be beneficial to the growth of China internally,” Cho said. “But now with this trade war going on... transactions aren’t really happening, especially not into the US. I don’t think Chinese companies are willing to take that risk on obtaining regulatory approvals.”
One sector in China that has most abruptly felt the slowdown in external investment are technology firms.
Global funding for technology companies declined 21.7 per cent to US$173.6 billion so far this year, according to a recent report from Dealogic, with the most severe decline in China. Volume fell 75 per cent to US$19.2 billion in China in 2019, compared with US$76.7 billion last year.
“The decrease in activity could indicate a burst in the China technology bubble with investors more cautious joining an overpopulated market,” Dealogic said in its September 25 report. “This is evident with big Chinese investors, such as Tencent Holdings and Alibaba Group Holding, slowing down their pursuit of Chinese technology companies.”
Alibaba is the parent company of the South China Morning Post.
