If you were a budding Chinese venture capital (VC) or private equity (PE) manager, it’s probably best to put 2019 way behind you. It was not a vintage year.
The number of new funds being setup hit a five-year low in 2019, while total fundraising for all funds shrank to $140.8 billion, almost one-fifth of the total amount compared to the year prior, according to CVSource data.
Over a longer horizon, the story of the early to later stage investment sector in China is a far more positive one. In fact, in the last decade it has had a profoundly positive effect on China’s economy.
Back in 2009, US dollar-denominated funds used to be the mainstream investment channel for PE and VC investors operating in China. The global financial crisis of 2008 was a turning point that moved the needle in a new direction; the rise of the renminbi-denominated fund began in earnest.
As China pumped billions into its economy to tackle the financial fallout triggered in the US, it was clear the government was set on finding ways to support and protect its burgeoning SMEs. For example, ChiNext – a Nasdaq-style board of the Shenzhen Stock Exchange – was set up to attract fast-growing enterprises with less stringent listing standards than those of the Main Boards. In the same year, it also made it easier for renminbi fund investors to exit their investments and encouraged them to look more closely at China’s homegrown talent.
Big private equity brands saw the winds of change too. Carlyle, Blackstone, KKR all raised their first renminbi funds around 2009, prompting their Chinese counterparts to ask: “Since they can do it, why can’t we?”
FinanceAsia decided to find out which investors have not only survived the last ten years but thrived. According to the data gathered from CVSource, if you had placed your bets on manufacturing, or manufacturing-related business, you would have come out top trumps.
In total, fundraising peaked in 2017, with 3,574 funds managing to raise Rmb1.79 trillion ($257 billion), almost 13 times higher than in 2009.
The renminbi fund boom created a lot of momentum, promoting the development of the Internet, sharing economy and increased consumption, according to research website Qianzhan. In China, the total amount of renminbi private equity funding accounted for 45.2% in 2010. By 2017, renminbi funds contributed 93.6% of the total fundraising in China.
In terms of return in investment (ROI), the most successful renminbi funds of the last ten years was managed by Cowin Venture. Its 2009 renminbi fund generated 876% ROI, a remarkable achievement.
FinanceAsia spoke to Ben Zhao, founder and managing partner of Cowin Venture to get some insight into why the fund was so successful and his opinions on the future of private equity in China.
Founded in 2009, Cowin Venture focused on angel and early-stage investment in IT and healthcare. “The management team has an technology R&D background, so that is why we view our portfolio companies from a very practical way,” Zhao said, adding that gives them an advantage of digging into areas everyone else is afraid to venture.
He recalled one of his best investments was in communications equipment company Zhongji Innolight, now Shenzhen-listed. Cowin Venture started reviewing the company in 2008 when Chinese investors were still haunted by the 2000 dotcom crash. Cowin made several investments, totalling Rmb400 million ($57.7 million), and this project finally generated returns of Rmb3 billion. The company counts Facebook and Google as some of its top clients.
“Our logic is quite down-to-earth,” Zhao said. “When everyone else is not doing it, you might have the chance for a big gain.”
Turning Point
Rather than an investment firm, Zhao said Cowin Venture runs like an enterprise. By viewing each fund as a product, Zhao said the company is focusing on delivering revenue at low cost. He recalls 2009 being a turning point in the development of China’s early stage investment markets.
“The number of renminbi funds started to increase in 2009 alongside the establishment of ChiNext,” Zhao recalled. “That was the time when people started with bigger later-stage investments. When later stage investment became too crowded, more VC funds were set up to do smaller and early-stage investments.”
In late 2018, the release of a new rule that restricted the funding source for private equity investments, forced a restructuring of the whole industry. Many smaller funds were weeded out.
Zhao thinks the move is a good thing, expecting the industry to follow in the footsteps of the US and sharpen up its game, with more emphasis on long-term capital commitment.
“Some startup founders are good at R&D, but not necessarily in company management,” Zhao explained. “The trend is clear; we will have more professional managers joining fund startups after gaining experience in big firms. And this can truly help them grow in a professional and efficient way.”
Right now, Zhao said the fund is poised to invest in a pre-IPO round of a company providing flow cytometry technology – a technique that detects and measure physical and chemical characteristics of a population of cells. The US companies used to have a monopoly on such technology, but the company Cowin Venture is investing is developing its own patent. Zhao didn’t reveal the name but said the company is aiming to list in the US.
“Going public is not [always] the final goal,” Zhao added. “Investors should always remember cash out is the key to all investments. And it goes back to the nature of the business, we should always examine whether the company can make money in the long-term, whether it has a potential to grow big and is there any related product.”
FinanceAsia will publish a full report on the development of the Chinese VC and PE markets in the Spring edition of the magazine.
