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China-Focused Venture Capital Funds See Slow Start to the Year, Dragging Down Asia-Pacific Fundraising
China's Economic Rebound Slows, Investor Caution Persists
China-focused venture capital and other private investment funds in Asia-Pacific are experiencing a slow start to the year, which is expected to result in the lowest fundraising in the region in the past decade, according to a report from alternative assets research firm Preqin. Factors such as ongoing economic uncertainty and geopolitical tensions related to China are contributing to investor caution. The rebound of China's economy from the pandemic has also slowed, and the fallout from Didi's U.S. initial public offering and increased regulatory scrutiny have further hindered international investment trends.
Regulatory Risk Adds to Investor Concerns
China-focused venture capital funds raised $2.7 billion in the second quarter, a decline of over 50% from the first quarter, negatively impacting overall VC fundraising in Asia-Pacific. Regulatory risks, as well as potential shifts in government policies, are adding more risk to the equation, deterring venture capitalists from making investments. However, while caution persists, sophisticated U.S. investors understand the need to diversify their portfolios and are still searching for opportunities in China and India to maximize returns.
China's Economy Holds the Key to Asia-Pacific Recovery
Preqin's analysts believe that China's economy plays a crucial role in the full recovery of the Asia-Pacific region. Despite the challenges, China offers a broad range of investment opportunities and deep capital markets, making it an attractive market for investors. China also holds significant influence as the top trading partner for many Asia-Pacific countries. New rules for private investment funds in China, set to take effect on September 1, aim to guide venture capital investment in innovative startups for long-term growth.
Challenging Year for China-Focused Private Equity Funds
In addition to venture capital, China-focused private equity funds are facing an even more challenging year. Fundraising in 2022 was just under 12% of what was raised in 2021. Preqin notes that the assets under management of China-focused private equity firms declined for the first time in at least five years. This decline is driven by slower new capital inflows compared to the liquidation of existing investments, potentially leading to declining valuations.
Japan Attracts Investor Attention
While China's fundraising challenges continue, Japan is attracting investor attention. Regional funds in Asia have increased their share of APAC private equity fundraising, with Japan-focused Advantage Partners raising nearly $1 billion in the second quarter. Japan has had the highest private equity deal-making activity in Asia-Pacific for two consecutive quarters, while deals in greater China have declined by over 55% in the same period. The perceived lower risk and stable returns of Japan's market, coupled with the depreciation of the Japanese yen against the US dollar, make it an appealing destination for foreign investors, especially in real estate.
A Focus on Advanced Technologies in Asia-Pacific
Amid the technology race between China and the US, Preqin expects a growing focus on advanced technologies across Asia-Pacific. This will likely lead to more investments in the region, particularly in sectors such as semiconductors and the electric car supply chain. The intensifying competition between China and the US will create investment opportunities for private investors along these value chains. Warren Buffett's increased investments in Japan this year further highlight the potential of the Asia-Pacific region for investors.
Conclusion: Slow Start for China-Focused Venture Capital Funds Offers Opportunities for New Businesses
The slow start of China-focused venture capital funds in the Asia-Pacific region, coupled with ongoing economic uncertainty and regulatory risks, has created a challenging environment for investors. However, this situation also presents opportunities for new businesses looking to enter the market.
While fundraising for venture capital and private equity funds in China has declined significantly, sophisticated U.S. investors recognize the need to diversify their portfolios and are still actively searching for investment opportunities in China and India. This opens doors for innovative startups to attract funding from experienced venture capitalists.
Furthermore, China's economy remains a key player in the full recovery of the Asia-Pacific region. With its broad range of investment opportunities and deep capital markets, China continues to be an attractive market for investors. The upcoming implementation of new rules for private investment funds in China also aims to guide venture capital investments in innovative startups, encouraging long-term growth and creating opportunities for new businesses.
In addition to China, Japan has emerged as an appealing destination for foreign investors. The perceived lower risk, stable returns, and recent increase in private equity deal-making activity make Japan an enticing market, especially in sectors like real estate. New businesses in Japan can leverage the attention it is attracting to secure investments and drive growth.
Moreover, the intensifying technology race between China and the U.S. is expected to lead to a growing focus on advanced technologies across the Asia-Pacific region. This presents opportunities for new businesses operating in sectors such as semiconductors and the electric car supply chain to attract investment from private investors keen on capitalizing on the competition between these economic powerhouses.
Despite the challenges faced by China-focused venture capital funds, this slower start to the year provides fertile ground for new businesses to secure funding and thrive in the evolving investment landscape of the Asia-Pacific region. By leveraging market opportunities, embracing innovation, and navigating regulatory risks, entrepreneurial ventures can position themselves for success in this dynamic market.
Article First Published at: https://www.cnbc.com/2023/07/27/china-vc-slump-is-set-to-drag-apac-fundraising-down-to-a-decade-low.html