Data Stories: China Private Equity and Venture Capital Trends Q3 2022

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Fundraising Trends

A rebound in China-focused fundraising activity in 2021 reversed in 2022 as investors were skeptical as tighter regulations, geopolitical tensions and pandemic-related headwinds persisted.

After a series of quarterly declines since the start of the year, only nine funds raised $3.3 billion in the third quarter, down 83% from $19.5 billion a year earlier, according to the data from Preqin on the S&P Capital IQ Pro platform.

Despite the smaller number of funds closed, the average closing size since the beginning of the year (YTD) increased for the second consecutive year to reach $642.7 million, nearly five times the $137.9 million in 2020. Substantial growth in recent years can be attributed to the closings of several large funds in 2021 and 2022, including Hillhouse Investment Management, Ltd.’s $18 billion Hillhouse Fund V, KKR’s KKR Asian Fund IV & Co. Inc. of 13.7 billion USD and Blackstone Capital of 11 billion USD. Partners Asia II LP Blackstone Inc. closed its doors at the beginning of the year.

Source: Preqin data on the S&P Capital IQ Pro Platform as of October 10, 2022. Graphs/tables for illustrative purposes only.

In terms of industry scope, information technology remains the most closely watched sector among all newly closed China-focused funds, with 19 mentions year-to-date, followed by consumer. and health with 16 and 14 mentions, respectively.

The recent trend of private equity investors moving away from the internet and software sectors towards consumer and healthcare is no coincidence with China’s short-term strategy to boost the post-economic recovery. -covid and its long-term strategy underpinned by “dual circulation” and “shared”. prosperity initiatives,” in which consumption is at the heart of both success stories.

Source: Preqin data on the S&P Capital IQ Pro Platform as of October 10, 2022. Graphs/tables for illustrative purposes only.

Private Market Transaction Trends

Private market transactions in China were affected by the slowdown in fundraising and gloomy investors. Chinese start-ups raised a total of $39.7 billion in the third quarter of 2022, down 34.3% from $60.4 billion a year earlier.

The number of deals decreased across all deal types except seed funding rounds. Year-to-date, 902 early-stage deals have already been announced/closed, surpassing the 893 deals announced/closed throughout 2021.

Across all deal types, VC rounds outpaced deal count, with 951 deals announced/closed in Q3, more than the other three funding types combined.

Source: S&P Capital IQ Pro Platform data as of October 10, 2022. Graphs/tables for illustrative purposes only.

The average ticket size for mature and growth funding rounds in the third quarter decreased to $78.3 million and $64.7 million, respectively, from $82.9 million and $75.2 million in the third quarter of 2021.

Early-stage investments remained strong, with the average deal size at $5.6 million, up from $3.4 million a year earlier.

Venture capital investments increased slightly to $29.5 million from $28.9 million over the same period.

Source: S&P Capital IQ Pro Platform data as of October 10, 2022. Graphs/tables for illustrative purposes only.

Environmental, Social and Governance (“ESG”) Investing

There has been a notable increase in ESG investing by private equity and venture capitalists across all types of transactions since the start of the year.

Year-to-date, renewable energy, electric vehicles and energy storage have topped the list of the most invested sectors in China in terms of transaction value, followed by artificial intelligence, machine learning and oncology.

As regulators and policymakers continue to drive the ESG agenda across sectors to accelerate efforts towards net zero goals, we expect ESG investing to continue to gain momentum with private equity investors. -investment and venture capital, which will boost the value and volume of future transactions.

Source: S&P Capital IQ Pro Platform data as of October 10, 2022. Graphs/tables for illustrative purposes only.

In terms of funding flows, ESG-themed renewables, electric vehicles and energy storage are attracting more capital through mature seed and venture rounds, while growth and start-ups are betting more on high-tech (like artificial intelligence and machine learning) and health-related sectors (like oncology).

Source: S&P Capital IQ Pro Platform data as of October 10, 2022. Graphs/tables for illustrative purposes only.

Unicorn births in China

The number of Chinese-born unicorns continued to decline, from 19 the previous year to 13 since the start of the year, after a sequential decline since 2018, while the average valuation of new Chinese unicorns jumped to 10, 2 billion USD compared to 2.7 billion USD in 2021.

The highest valuation so far this year comes from Nanjing Xiyin Electronic Commerce Co., Ltd. (or shein), a Chinese fast fashion e-commerce platform, which completed a $1.5 billion Series F round in April, valuing the company at a whopping $100 billion. It is followed by lithium-ion battery maker Jiangsu Horizon New Energy Technology Co., Ltd. and electric vehicle maker Zhiji Motor Technology Co., Ltd., which were last valued at $10 billion and $4.4 billion, respectively.

Pennyrc: S&P Capital IQ Pro Platform data as of October 10, 2022. Graphs/tables for illustrative purposes only.

Unicorn IPOs in China surged in 2022, with seven listings year-to-date, compared to just two in 2021.

Due to regulatory repression in the technology and education sectors as well as the current healthcare crisis, only two unicorns entered the IPO market last year, and the average time time to market after unicorn status was 3.5 years, the longest in the past decade.

As China’s tech crackdown showed signs of waning this year, the market reacted positively, with an increase in the number of successful unicorn IPOs and a shortening of the average time to market to 2, 7 years.

Source: S&P Capital IQ Pro Platform data as of October 10, 2022. Graphs/tables for illustrative purposes only.

Private equity outflows

While private equity outflows fell from 103 deals last year to 53 year-to-date, total deal value topped $21.9 billion, topping a record $20.6 billion. dollars last year.

The increase in total deal value was driven by information technology mega-deals, with 12 outflows worth $14.3 billion. Next came Materials and Industrials, with 8 and 11 exits, worth $4.8 billion and $1.9 billion respectively.

Source: S&P Capital IQ Pro Platform data as of October 10, 2022. Graphs/tables for illustrative purposes only.

Valuations remain elevated in current market conditions. The average exit EBITDA multiple of private equity firms in China reached a record high of 58.7x year-to-date, compared to 44.0x in 2021 and 31.4x in 2020.

The elevated valuations are primarily driven by the information technology space, reflecting increased competition from potential buyers in the sector seeking high-quality assets such as semiconductors and application software, as well as the greater selectivity of sponsors for many of these opportunities.

Source: S&P Capital IQ Pro Platform data as of October 10, 2022. Graphs/tables for illustrative purposes only.

Beyond the Numbers

Looking ahead, what does the future hold for private equity and venture capital firms in China?

ESG, healthcare, electric vehicles, semiconductors and the metaverse are the top five hot topics widely discussed by research brokers spanning companies, sectors and trends across the region, according to findings from our after-sales research team. Chinese technology and net zero goals are also among the most popular reports among private equity firms in this region.

Given the increasing complexity of today’s ever-changing markets, private equity firms will continue to seek out the latest information to help them better navigate the current environment.

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