Trade war to usher in a tougher era for PE, VC investors, say execs

The words "Made In China" are seen on an object displayed for a photograph in Tiskilwa, Illinois, U.S. Photographer: Daniel Acker/Bloomberg

The U.S-China trade war is starting to hammer private equity and venture capital investors.

The dispute has resulted in a significant decrease in fund launches, trouble in closing new funds, reductions in startup valuations and delays in deploying capital, according to fund managers, lawyers and administrators speaking at a summit organized by the Hong Kong Venture Capital and Private Equity Association.

“Since December we’ve seen actual material impacts, before that it was a lot of headline-grabbing stories and a lot of talk,” said James Donnan, managing director of fund administrator Intertrust NV in Hong Kong and one of the speakers at the China Private Equity Summit.

Donnan said his business has seen venture capital and private equity fund launches cut in half in the last six months compared with the year before. “This is a new normal,” he warned. “Things have shifted and therefore investments have to shift to make more domestic plays and cutting down on cross border.”

The impact of the trade tensions has also hit funds’ portfolio companies. Recently, the Taiwanese maker of a cable set-top box was told by regulators that the chips it previously employed in its products could no longer be used because they are made by a subsidiary of Huawei Technologies Co., said Linda Luo, managing director of KHL Capital, which focuses on tech and healthcare investments and has about $1 billion under management. She declined to disclose which portfolio company she was describing.

Luo said her fund previously looked for cross-border opportunities where companies could marry the benefits of American technology with the vast China market. Now, the fund is looking for opportunities in greater China tech companies that might benefit as giants like Huawei are locked out of the U.S. market.

Money is also flowing into Chinese tech companies from state-backed PE funds.

“State-backed PE funds are not looking at their investments from a return generation perspective, but a tech security perspective,” Intertrust’s Donnan said. “They are throwing a lot of money to try to come up with solutions to reduce China’s reliance on the U.S.”