Greater China-based private companies recorded a quarter-on-quarter growth in both deal count and value in the three months ended June 30, despite a slowing economy and the coronavirus pandemic, according to DealStreetAsia Research and Analytics’s latest report.
Counting deals worth at least $10 million, companies raised a total of $9.3 billion in the second quarter, up 7.7 per cent from the first quarter, according to Greater China Deal Review: Q2 2020.
The increase appears significant given the high base effect in Q1, which saw a couple of billion-dollar-plus deals – Beike Zhaofang ($2.4 billion) and Yuanfudao ($1 billion) – in March. In comparison, there was only one mega-deal in Q2 – MGI Tech’s $1 billion financing in May.
If we include deals worth less than $10 million, the total capital raised in the second quarter stands at $9.5 billion.*
Although largely reflective of negotiations that preceded the COVID-19 pandemic, the dealmaking spree — the second quarter saw a 39 per cent increase in deal volume over the previous quarter — was partly helped by the easing of lockdowns across the region towards the end of March.
Investors, unsurprisingly, showed a marked preference for businesses that showed resilience in the face of the virus crisis and/or addressed challenges caused by lockdowns. Companies in the healthcare and allied segments, as well as those in the education and software market, were among the biggest beneficiaries in the second quarter.
Given the strong IPO results of China-based biotech firms such as Peijia Medical, whose $302 million offering in Hong Kong was 1,184 times oversubscribed by retail investors, the attractiveness of this group of companies will endure in a post-pandemic world.
Following the Luckin Coffee scandal and the market dislocation caused by the pandemic, investors will be more selective and are likely to favour businesses with strong fundamentals and digitalisation at the core of their strategy. Data compiled by DSA Research & Analytics also showed that there were higher number of deals done at the B series round, as compared to the previous quarter.
“There used to be a push for growth at all costs, overlooking fundamentals like the unit economics of the business model. That led to companies being valued, probably, excessively and not in line with their fundamentals… I think – with this downturn – you’ll see that a lot of excessive valuations are being squeezed out,” said Helen Wong, partner at Qiming Venture Partners.
Deal-making is likely to benefit from Beijing’s focus on shoring up the economy and driving consumption through a host of favourable policies. China’s push to reduce its tech dependence on the US will also spur more investments in domestic firms, say investors.
“As the Chinese government and companies ramp up efforts to develop self-reliant chips and devices, we are convinced that many more novel companies will emerge… We have seen that technologies related to 5G, AI and industrial internet have been highly in demand amid COVID-19,” said Ying Wenlu, chairman of Addor Capital.
*Note: DSA Research & Analytics team started to collect data for deals under $10 million from April this year.
Access Greater China Deal Review: Q2 2020 to access deal data by industry, vertical and funding stage as well as top investors and investment destinations. This report is available to DealStreetAsia Research & Analytics subscribers.