PEI 300: Chinese venture capital gains momentum

Investors are piling capital into the country’s VC sector as the memory of its distribution problem begins to fade.

A number of Chinese venture capital firms rose to prominence in this year’s PEI 300.

Among them is Qiming Venture Partners, which rocketed from number 200 last year to number 139 in 2021. The rise is due in large part to the $1.2 billion raised for its Qiming Venture Partners VII in November and 2.85 billion yuan ($443 million; €364 million) for Qiming RMB Fund VI earlier this year. It has collected a total of $3.8 billion over the past five years.

Also in the ascendancy is Gaorong Capital, an early and growth-stage investor that climbed from 209 in 2020 to 168 this year. The firm raised $1.15 billion for its fifth USD-denominated fund in October, bringing its five-year total to about $3 billion.

Shanghai-based 5Y Capital enjoyed the biggest climb of any Chinese venture capital firm, shooting up from 270 last year to 171 this year. The firm – formerly known as Morningside Venture Capital – held $2 billion worth of final closes this year for funds, including 5Y Capital Growth Fund I, 5Y Capital Evolution Fund II and 5Y Capital RMB Fund.

Meanwhile, Beijing’s Source Code Capital made its PEI 300 debut. The firm appeared at 180 thanks to a flurry of fund closes in recent years. It closed two funds in March, raising $420 million for Source Code Venture Fund V and $580 million for Source Code Growth Fund II. Moreover, it collected 3.8 billion yuan for Source Code Fund IV-RMB in October.

Liquidity issues

Though China’s venture capital market has performed well in recent years, liquidity has been an issue. The country was the top-performing market for venture capital in terms of TVPI in 2018, delivering 1.72x versus 1.63x for US funds, according to a 2019 report from eFront.

However, Chinese VC also had one of the longest times to liquidity, with much of this value unrealised. “Historically the market was great on paper, but not in DPI,” Vince Ng, a Hong Kong-based partner at placement agent Atlantic-Pacific Capital, tells Private Equity International. “In the old days there was a bit of a mentality whereby they wanted to capture as much value as possible, not leave a ton on the bone, and in essence holding on to assets longer than they should.”

Still, there are signs that China’s exit environment is thawing. There was $148 billion-worth of VC-backed exits in Asia in Q1 2021 – a total greater than the $134 billion recorded for the entirety of 2020 – of which $87 billion was from China-based companies, according to KPMG.

“A lot more [firms] have heard investor feedback that you need to give money back; you can be a 10x but if I’ve got nothing back it means nothing to me,” Ng says. “They’re more cognisant in terms of the actual portfolio managing of the entry and exit, not just the entry part. So the market macro dynamics have helped, and the micro-manager sentiment has helped as well.”