23/09/2017 11:09 AST
China-focused venture capital funds are increasing their bets on local technology companies and a further opening of Chinese domestic capital markets, raising money in the yuan at the fastest pace in five years.
Fund managers have raised 95.8bn yuan ($14.54bn) this year through late September in funds denominated in the Chinese currency, which is also known as the renminbi, compared with 56.7bn yuan in all of 2016.
That puts 2017 on pace to be the biggest year since 2012, when 145.8bn yuan was raised, according to data provider Preqin.
There are currently 78 funds looking to raise as much as another 1.15tn yuan over the next couple of years, Preqin said, most of it coming from mammoth-sized state-owned entities and so-called government guidance funds, which seek to foster domestic innovation in different industries from advanced engineering and robotics to biotechnology and clean energy.
Those include the 350bn yuan sought by the China Structural Reform Fund, 200bn yuan targeted by the China State-Owned Capital Venture Investment Fund and a proposed 150bn yuan for the state-owned Enterprise National Innovation Fund.
The enormous size of the fundraising ambitions of the Chinese state-backed funds means it may take some time before they reach their final goals.
The China Structural Reform Fund, which was launched in 2016, has raised 20% of its registered capital and its president said in an interview with Caixin Global that funding will be completed by the end of 2018.
“We’re at the all-time highest of capital-raising high water marks, with a tsunami of government-backed entities seeding incubators, VC funds, locally, provincially, nationally,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital.”China has a lot of money in its government apparatus.
It wants to seed innovation and entrepreneurship and this is how it’s doing it.” The surge contrasts with the slowdown in seed financing for start ups in the United States, which is down for the past two years.
It also compares with flat growth expected for US
venture capital fundraising in 2017, according to estimates from the National Venture Capital Association (NVCA). Firms such as Lightspeed China Partners, Morningside Venture Capital, GGV Capital and investment and merchant bank Ion Pacific that previously only had US dollar funds are launching their first funds in yuan.
Others like Hillhouse Capital, Sequoia Capital China and China Renaissance that have raised funds in both currencies are adding to their yuan cash pile with new funds.
Key to those firms is to not lose potential investment opportunities in sectors closed to foreign investors or miss out on investing with the Chinese entrepreneurs who now want to list their companies locally instead of in the United States.
“Catching the right entrepreneurs in the ecosystem is our number one priority, so currencies to us are just tools, those are the tools that I need to catch these entrepreneurs,” said Harry Man, partner at Matrix Partners China, which has funds in both currencies.”That’s why if you don’t have RMB in your hand, ultimately you’ll be missing 50% of the deals.
Then you’ll be forced to raise an RMB fund and that’s why everybody is doing it.”
Sequoia Capital China, which backed top Chinese technology firms such as Alibaba Group, is looking to raise at least 10bn yuan for a new fund, while Hillhouse Capital, an early investor in companies including Tencent Holdings Ltd, Baidu Inc and JD.com, is targeting about 8bn yuan for its fund, sources told Reuters.
Reuters
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