Private-equity, venture capital investors bet on China’s pivot to domestic demand, self-reliance
- Domestic demand will feature much more importantly, says Shen Jianguang, vice-president and chief economist at JD Digits
China having to become more self-reliant amid its trade war with the United States will present attractive buying opportunities for private-equity and venture capital investment, industry experts have said.
“As the private-equity and venture capital sector, we need to understand that this is the new norm – we can’t wait until a deal is done,” James Donnan, managing director of fund administration services company Intertrust Hong Kong said on the sidelines of the HKVCA China Private Equity Summit 2019 on Thursday.
“We need to understand that things have shifted, and therefore our investment thesis needs to shift, looking more towards domestic consumption play.
“There is a lot of negativity in the market, but still tremendous opportunity if you are selective in deal making,” he said.
The number of new venture capital funds launched by foreign and Chinese managers for China-bound investment slowed in the first quarter this year, dropping 55.6 per cent year on year to total 106, according to private-equity research group Zero2IPO. The amount of newly raised capital too declined, and was down 17.2 per cent to 41.1 billion yuan (US$5.95 billion).
China consumer market ‘too big to ignore’ for foreign investors
While the trade war between Beijing and Washington escalates, there are still plenty of investors interested in China’s private-equity market, particularly in sectors that will help it become more self-reliant, and that are focused on domestic consumption.
“Domestic demand will feature much more importantly,” said Shen Jianguang, vice-president and chief economist at JD Digits, a financial affiliate of Chinese e-commerce giant JD.com. “Increasingly, China will focus on the services sector, innovation, research and development and things that are [currently] reliant on US companies. Now China will try to catch up more quickly.”
Huawei Technologies, for instance, sources components from 22 suppliers listed in the US, according to the Jefferies group. Semiconductors, therefore, pose an attractive bet, said Eric Xin, senior managing director and managing partner at Citic Capital, the investment arm of Chinese financial conglomerate Citic Group.
Winter is coming for China’s private equity as market rout hits start-up valuations
“There will be opportunity to look at domestic supply chains of semiconductors, because if the US doesn’t sell to China, then all of a sudden the market is available,” Xin said. “Anything that is in the US, you always have a copycat [in China].
“Whenever one door closes, another one opens,” he said.
Investors are looking at sectors such as logistics and technology, most of which are based in Shenzhen, “China’s Silicon Valley”, said Andrew Weir, regional senior partner at KPMG Hong Kong and vice-chairman of KPMG China. “I know [of Hong Kong-based] private-equity firms jumping on anything that moves in Shenzhen,” he said.
Southeast Asia appeals to private equity firms and venture funds amid trade war
According to Frankie Fang, managing partner of Starquest Capital, a Beijing-based fund of funds and direct investment firm that holds assets under management worth 25 billion yuan, China’s private-equity market has not been swayed by the US-China trade war.
“I have asked some of these foreign investors why they continue to invest in China despite the escalation in US-China trade war,” Fang said. “They told me the returns from investing in China remained attractive relative to other markets, and that is a key reason why they continue to allocate their capital in Chinese private businesses.”
The country’s maturing domestic venture capital firms and a start-up environment that has become more regulated in recent years, are positive developments that give comfort to foreign investors putting their money into China, he said.
