Early-stage fundraising in China slips to lowest level since 2009
Fundraising by China-focused private equity investors has fallen to its lowest level in 13 years, as the country’s early start-up scene backers grapple with a tech crackdown from Beijing and zero Covid policies.
Venture capital and private equity funds focusing on the Greater China region raised just $1.7 billion in the first quarter of 2022, according to estimates from industry data provider Preqin, down from more than 90% over one year. It is the smallest gain since the depths of the global financial crisis in 2009.
The sharp drop in fundraising by the kind of early-stage investors that helped Alibaba and Tencent become global brands underscored growing uncertainty about how to operate in China.
Since the start of a regulatory crackdown by the country’s government last summer, top officials have discouraged disruptive profit-seeking by fast-growing start-ups and imposed stringent security reviews. These restrictions have halted most offshore listings until Chinese regulators release more details on the rules for foreign IPOs.
Fund managers said the sharp drop in fundraising reflected growing difficulties faced by private investment groups – especially foreign companies – as Beijing sought to better monitor the markets.
“This is a significant change,” said William Bao Bean, general partner of global venture capital firm SOSV, adding that early-stage foreign investment in China had entered a “period of uncertainty” after a wave of successful fund closures in the first half of 2021.
Investor concerns have been heightened by Chinese leaders’ strict adherence to a zero-Covid policy, which led to a more than five-week lockdown in Shanghai, the country’s financial capital, and caused severe economic disruption. Weijian Shan, whose private equity group PAG manages more than $50 billion, said in a recent video-recorded meeting that the actions of Chinese leaders “have caused real damage to the market and the economy.”
President Xi Jinping reiterated his opposition to what regulators called a “disorderly expansion of capital” at a recent meeting of senior Chinese Communist Party officials. Xi told politburo members meeting in Beijing late last month that capital that seeks only profits without regulation or restriction would cause “immeasurable damage” to China and that rules were needed to guide its “development.” healthy”.
Regulatory power has been expanded to allow for greater scrutiny of foreign investment, with a particular focus on “capital penetration”, or the ultimate source of funding for Chinese companies, especially those that play a role in the drive to technological independence from Beijing.
“Strategic or sensitive sectors [in China] have never welcomed foreign investment,” Bao Bean said, “and that list has grown.”