LPs see ‘gold rush’ in China VC

Continued investor focus on the strategy means costly valuations, resulting in median returns, say Asia-based LPs.

Venture capital investment in China is hitting new highs, Asia-based investors said on Tuesday in Hong Kong at the HKVCA China Private Equity Summit 2018.

Doug Coulter, partner and head of private equity for Asia-Pacific at Zurich-headquartered LGT Capital Partners said he sees a bifurcation in the market, with money flowing into venture and technology, media and telecommunications.

“Clearly there’s some sort of bubble going on when LPs are seeing late-stage price deals, it’s something we worry about a little bit,” he noted. “The other thing that is going on in [China] venture is the gold rush into VC, as if it’s 1970s or 1980s America.”

LGT manages $30 billion of assets in private equity of which 15 percent is in Asia-Pacific. Around half of its Asia-Pacific exposure is in China.

Olivia Ouyang, director of funds at Ontario Teachers’ Pension Plan, said that China’s technology giants Baidu, Alibaba, Tencent and JD.com, collectively known as BATJ, are playing an important role in VC.

According to Ouyang, BATJ account for about 40 percent of VC investing in the region and are often preferred by entrepreneurs “because they bring their whole ecosystem to bear”.

Ouyang also pointed out that in Asia, the phenomenon of flight to quality seems to be even more serious than America and Europe. “This means funds with a better track record get a disproportionate amount of attention and LP commitment, creating regional funds that are now in the range of $6 billion to $10 billion. This used to be unthinkable previously.”

OTPP manages C$189.5 billion ($147 billion; €125 billion) in assets, of which $30 billion is in private equity.

Venture investment in China reached a record high of over $40 billion last year, a 15 percent increase from the $35 billion the previous year, according to a report from KPMG.