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Chinese PE and VC Firms shun risk amidst coronavirus uncertainty

Written by Venture Matters Published on   3 mins read

Despite a recovery in March, funding for new startups dried up in Q1.

Investments by private equity (PE) and venture capital (VC) firms in China suffered a sharp decline in the first quarter of 2020, recent figures showed, in another stark sign of investors’ fears about the economic impact of the coronavirus outbreak.

While VC funding rebounded in March, deal volume still plunged by 34% during Q1, compared to 1,278 deals made in the same period last year, according to an analysis obtained from Jingdata, a Beijing-based financial data service provider.

New funding for Chinese start-ups dried up, as investors’ appetites for risk plunged. Just 94 seed funding rounds were concluded by the end of March for startups that have yet to become operational, compared to 301 in Q1 2019. Series A funding more than halved, with 203 investments made in Q1, down from 418 in the same period last year.

Many investors still expect a rapid “V-shaped” recovery by the end of June, a hope that has been buoyed by the gradual reopening of China’s economy, as coronavirus case numbers have remained low for the past month.

However, there is still concern over investors’ confidence. The 2003 Severe Acute Respiratory Syndrome outbreak (SARS) in China, for example, led to an economic downturn that took more than a year to recover from, even if the health crisis was less severe when compared to the COVID-19.

A survey by 36Kr Research, which analyzed the moves of over 3000 investment firms over the past year, has found that crowdfunding revenue had started to decline even before the beginning of the coronavirus outbreak.

Firms that primarily invest in startups and first-round funding in the tech sector have been hit particularly hard, as China moves to tighten previous funding streams for private equity in the shadow banking sector.

Still, larger VC firms have fared better. Many are readying large cash arsenals in anticipation of new investment opportunities during the economic recovery. For example, Hillhouse Capital Group, a multinational private equity group with offices in Beijing and Hong Kong, has set aside USD 13 billion to support new startups.

A spike in demand for storage facilities during the pandemic has also buoyed firms such as Shanghai-based GLP, China’s largest private equity firm, managing logistics facilities and real estate. It recently announced an investment of USD 15 billion in new logistics projects spanning from the Yangtze River Delta to the Jingjinji Metropolitan Region, a large economic zone encompassing Beijing, Tianjin, and Hebei.

The healthcare industry received increased investment during Q1. Source: Shutterstock

Healthcare, online education, and entertainment defy downward trend

One sector that bucked the trend during the coronavirus crisis has been the healthcare sector, which has attracted 197 investments up to the end of April this year, representing a sharp increase of more than 55% year-on-year.

Data from Jingdata also suggests growing interest among investors in the dining and catering sector, online education, and media entertainment, in light of new demand arising from the coronavirus pandemic.

The investment hike is expected to drive recovery in the sector. Global accounting firm PwC said in an April report that deals are expected to rebound in the later half of 2020, driven by a strong interest in firms selling products such as health and wellness products, as China’s middle class continues to grow.

Chinese tech giant Tencent (HKEX: 0700) has also signaled its intent to throw its hat in the ring, with the launch of a website for its previously low-profile investment unit, Tencent Investment, in late April.

The unit has previously invested in firms including popular streaming platform Bilibili (NASDAQ: BILI) and Heytea, a popular bubble tea chain also backed by Meituan (HKEX: 3690), and is expected to make other significant technology investments in 2020.

The original article was written by Simone Gao for 36Kr, KrASIA’s parent company. 


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