Private market investors have challenged widespread concerns that China may have become “uninvestible,” stressing the importance of taking the right approach in the face of shifting market dynamics in the country.
At a recent industry event in Hong Kong, China-focused investors strongly advocated the opportunities in the country despite its slow economic recovery and weak market sentiment weighing on fundraising, dealmaking, and exits.
“Everything about the Chinese economy that could have gone wrong has indeed gone wrong,” said Fred Hu, founder, chairman, and CEO of Primavera Capital Group, during a keynote speech at the HKVCA Greater China Private Equity Summit 2024.
But “the widespread pessimism” about the world’s second-biggest economy is “overblown,” he said. People have “overlooked the underlying strength of China’s economy.”
His comments were followed by projections from the International Monetary Fund (IMF) that China’s economic growth will remain resilient at 5% in 2024, thanks to strong first-quarter GDP data and recent policy measures. But the global lender also estimated that growth in China would slow to 4.5% in 2025, before sliding further to 3.3% by 2029, due to an ageing population and slower expansion in productivity.
Rising local government debt and soft domestic consumption, much of which is linked to dampened consumer confidence amid a protracted real estate crisis, are some of the major stumbling blocks to a full-blown economic recovery.
China’s private market had a slow start to the year. An April report by Chinese market researcher Zero2IPO Research showed that the number of newly-launched private market funds in China dropped by 43.9% to 964 in Q1, while their total fundraising fell by 5% to about 353 billion yuan ($48.7 billion) compared to the same period in 2023.
Private market investors in the country completed 1,496 deals in Q1 — 36.7% less than the same period last year, the report said. Exits also reduced by more than half to 362, as tightened domestic listing rules led to a 52% year-over-year (YoY) decline in the number of mainland initial public offerings (IPOs).
“Is China still investible?”
When this question surfaced in discussions, investors on the stage seemed unperturbed, upholding their optimism in the country of nearly 1.41 billion population and detailing what they see as new opportunities across fintech, biotech, and consumption amid the changing market environment.
- From minority, early-stage VC to majority, control deals
PV Wang, Managing Director of Legend Capital, said he thought that China is uninvestible is “a typical overreaction” in a market downturn.
“What I would agree is the challenges and changes that we’ve seen on the regulatory and geopolitical front mean that the way to invest in China going forward, and even now, will be different from the past,” said Wang.
As the market matures and industry regulations progress, the historically popular strategy of focusing on minority shareholdings in early-stage venture capital (VC) deals to generate returns by simply riding on China’s rapidly expanding economy is losing its shine. Instead, opportunities are veering towards majority- and control-type deals, which involve more corporate restructuring and value creation by investors.
“Just like in the US, minority, early-stage venture and growth [deals] continue to be very important in China, but perhaps not as dominant as [they were] in the past 20 years,” said Wang, referring to this change as “a healthy and natural evolution of the market” that will require “increased specialisation of fund managers.”
- Focus on non-GDP-correlated opportunities
A slowing domestic economy has driven more investors to seek opportunities that are “not directly correlated with the GDP growth,” said Yan Yang, Managing Director and Head of APAC investment at BlackRock Private Equity Partners.
Such opportunities include health-focused strategies targeting the ageing population in China, where the number of citizens aged 60 and older is estimated to reach 402 million to account for 28% of the entire population by 2040, according to the World Health Organisation (WHO).
The silver economy is “only at the beginning” in China and there is “a big unmet gap” yet to be addressed, said Yang.
- De-globalisation gives rise to Chinese fintech
De-globalisation, characterised by continued geopolitical tensions between China and the US, is reshaping the competition landscape in areas including fintech, where China may snatch more market shares globally with its world-leading financial technology.
“We’re seeing an increasing trend of de-globalisation in the movement of money,” said Melissa Guzy, Managing Partner of Arbor Ventures. The development of more regionalised, localised payment networks in the next decade will create “an enormous amount of opportunities and financial service innovations,” benefiting investors, especially those behind China-born fintech, she said.
Globally, the US is still home to the world’s most valuable fintech companies, with Visa and Mastercard — the two biggest fintech companies by market value — posting a collective market capitalisation of $800.7 billion in 2023, according to Statista data analysed by CNBC.
But China is not far behind, with the world’s second-most highly valued fintech industry at a combined market cap of over $338.9 billion. Ubiquitous mobile wallets from its mega-payments firms, such as Tencent’s WeChat Pay and Ant Group’s Alipay, are battling to lead this lucrative industry that has grown over the years taking everything from retail banking to online wealth management.
“When it comes to financial services and fintech innovations, they start in China and then move to the West. That’s one of the core reasons why Asia is so important to our investment strategy,” said Guzy.
- De-globalisation or re-globalisation?
But instead of de-globalisation, investors like Nisa Leung, Managing Partner of Qiming Venture Partners, believe that the world is in fact going through “re-globalisation.” As fund managers rebalance their bets across geographies and industries, biotech in China is one area with great potential to deliver more mergers and acquisitions (M&As).
Leading biotech innovations are growing out of China, the US, and some parts of Europe in the aftermath of the COVID-19 pandemic, said Leung, as she observed a rising interest among global funds and large pharmaceutical groups in bringing China-developed drugs to the world.
According to Leung, Qiming recorded a combined $9 billion worth of out-licensing deals in the past 18 months that saw its biotech portfolios in China grant global pharmaceutical giants like Roche and AstraZeneca the rights to launch their products overseas.
2023 was the year when the number of out-licensing deals in China’s biotech industry exceeded that of in-licensing deals for the first time.
Chinese biotechs closed 63 cross-region out-licensing deals last year, a record for the industry and an 80% increase from the previous year, according to data from YAFO Capital, a Shanghai-based investment bank focusing on healthcare and biotech. The overall upfront payments for China’s out-licensing deals surged to $2.22 billion in 2023, more than doubling the $1.07 billion recorded in 2022.
- M&As in the world’s new biotech powerhouse
As China’s biotech innovations gain significant traction on the global stage, potential buyers from outside of China, particularly multinational companies, are reaching out to their venture backers to initiate M&A talks.
Tao Yu, a principal at China-based biomedical VC Lilly Asia Ventures (LAV), expects to see more M&As in the rest of 2024 and beyond. “[Biotech is] actually a seller’s market… [because] the quality of biotech in China is really improving to the standard that it is best-in-class,” said Yu.
LAV, which manages over $4.5 billion of committed capital, has booked three M&A transactions within its portfolio over the past six months. These deals include the acquisition of Proteologix by Johnson & Johnson in May for $850 million in cash; Danish biotech Genmab’s move in April to buy cancer drug maker ProfoundBio for $1.8 billion; and the completion of AstraZeneca’s acquisition of Gracell Biotechnologies in February for approximately $1.2 billion.
LAV was the largest shareholder of both Proteologix and ProfoundBio prior to their acquisitions.
In the Chinese market where biotech M&As are still in the early phase of development, investment firms like LAV are doing “a lot of work” to forge such trade sales, including building connections with potential multinational buyers, said Yu. He added that the increasing global recognition of China’s biotech has also encouraged fund managers to consider exit opportunities by listing their portfolios in the US.
There is “a learning curve” for foreign buyers to understand the corporate structure and dynamics of China’s biotech industry while shifting their focus from the US and Europe to China.
- Demand for good-value consumer products
China’s slowing economic growth, weak consumer sentiment, and intensified competition among brands across top-tier cities are driving strategy changes in the consumer sector. What is unchanged, investors say, is that the country remains a lucrative consumer market if one pursues it with the right strategy (localisation; go niche; good-value products).
For multinational companies in China, it means an emphasis on local leadership and deep market know-how to tap into the market that is increasingly driven by demanding consumers with rational spending in mind.
“If any company does not have a China head as part of the global management committee, that’s always a major reason for failing,” said Frank Tang, Chairman and CEO of FountainVest Partners.
Tang and other consumer-focused investors pointed to the strong growth of brands including KFC, Dairy Queen, and Walmart-owned Sam’s Club despite the widely reported sluggish retail sales in China.
Walmart, which brought its Sam’s Club to China in 1996, is accelerating the pace of store openings as its membership-based, low-price strategy resonates with thrifty Chinese consumers. The Sam’s Club chain has grown to 47 stores from just 26 at the end of 2019.
Yum China Holdings, the owner of the KFC and Pizza Hut chains in mainland China, celebrated one of its “strongest ever” years in 2023 with the firm’s full-year adjusted operating profit hitting an all-time high of $1.1 billion on the back of a 15% YoY revenue increase to $11 billion. The year saw KFC become the first Western quick-service restaurant (QSR) chain to pass the 10,000-store market in China and Pizza Hut surpass 3,000 stores.
CFB Group, a franchise ownership group that runs Dairy Queen and Papa John’s in mainland China, saw the number of its Dairy Queen stores more than double in just two years to about 1,250 as of March. In early 2022, FountainVest acquired CFB Group in a transaction reportedly worth $160 million.
“No multinational company with a profitable Chinese business would want to sell,” said Tang. Besides successful localisation, these retail chains are also more immune to geopolitical risks and the political tug-of-war in industries including biotech and artificial intelligence (AI), he added.
Ryan Law, a senior partner at Harvest Capital, a China-focused retail and consumer investment firm, listed “good value for money” as one of the three important criteria in his investment strategy.
“The lower, the more competitive — meaning that the restaurant chain needs to have really good supply-chain management and [to] perfect unit economics,” said Law.
Harvest Capital, which has backed food delivery giant Meituan and ride-hailing platform Didi Global, also targets providers of consumer products and services to meet “essential spending” or “high-frequency spending” of consumers, because these businesses are not easily affected by economic conditions, according to Law.
