… as China offers ‘huge new avenues’ for PE and venture

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China’s private equity and venture capital (PEVC) sector grew by 36 per cent in 2018, its lowest growth rate since 2014, hitting US$600 billion. This lower growth rate is perhaps understandable as total GDP grew only 6.2 per cent that year, the lowest in 27 years. But such growth rates can be misleading. What matters is the opportunity set for investors.

According to a new report by Preqin, the global provider of data and insights for alternatives investors, Greater China (including Taiwan and Hong Kong) has risen again as a global innovator. The 40-page report, ‘Private Equity & Venture Capital in Greater China’s Innovation Economy’ sets out the industries attracting the most interest, recent deals and exits, an investor survey of intentions and the views of external specialist fund managers.

Except for the period of China’s last imperial leaders, the Manchus of the Qing Dynasty from 1644-1911, China had led the world for centuries with inventions. From gun powder (9th century), and the matches to light it, to printing (11th century) and the paper to print it on (300 BC), and – little-known fact – the toothbrush (9th century). With the humble toothbrush, by comparison, the US didn’t adopt them for universal use until its World War I servicemen and women returned from Europe with samples. The originals were made in China from sticks and the bristles from the backs of the necks of cold-country pigs.

Joseph Needham*, an English scientist and historian, spent about 50 years researching Chinese inventions, publishing several books on the topic as volumes of his epic ‘Science and Civilisation in China’. He lists more than 250 of them in Part 2 of his seventh and last volume, published in 1993 before his death two years later. With these inventions he either unearthed their origins or proved them. Needham, like many historians before him and after, puzzled over the lengthy hiatus in innovation under the Qing, usually put down to a new enforced insularism and scorn for non-academic or artistic enterprises such as commerce.

The communists’ rule, after the civil war ended in 1949, was slow to reignite the natural talent it had at its disposal for innovation, but, after Chairman Mao’s death, by the time of Deng Xiaoping, who declared an “open door” policy in 1978 and a host of other reforms, innovation was starting to gather pace again. Which brings us to Preqin’s assessment of the current state of innovation in Greater China and the opportunities for investors.

Mark O’Hare, Preqin’s chief executive, said: “Enduring an economic slowdown and trade tensions with the US, the region has faced many challenges of late. It has therefore been necessary to switch up the game plan and move from an export-dependent economy to a nation powered by domestic innovation…

“As Greater China turns its focus to driving domestic consumption, this report dives deeper into six key sectors integral to the domestic PEVC market: healthcare, consumer discretionary, information technology, artificial intelligence, e-commerce and fintech. Each of these sectors has evolved tremendously in recent years and plays a vital part in building Greater China’s status as an innovation economy,” he said.

These industries were cited by most investors interested in Chinese PEVC in a survey undertaken by Preqin last August. The report also looks at some ancillary industries in China which will benefit from the trend, such as privately operated and/or online educational services companies.

Contributing his views on the private education sector in the report, Michael Mills, managing director for alternative products at Value Partners, says: “Currently, China is one of the world’s biggest exporters of students seeking overseas education. By expanding local higher education options, the private sector can tap into this demand. PE can play a key role in this expansion by helping to create bilateral arrangements with international institutions, or by setting up ‘twinning’ arrangements. Such initiatives would also attract international students to China.

“Furthermore, with the launch of China’s multibillion-dollar Belt and Road Initiative – a global fiscal stimulus package – we expect even more international students to look to China for their university education.”

Of the 50 investors surveyed for the report, the survey being conducted with the assistance of the Limited Partners Association of China, 54 per cent said they would invest in PECV in China in the next 12 months, either for the first time or increasing their allocations. Of these, 12 per cent said they would be investing US$500 million or more, 12 per cent between US$350 million and $US400 million and 18 per cent between US$100 million and US$350 million. The rest intended to invest less than US$100 million. Venture was the most popular type of fund indicated, totalling 31 per cent, followed by ‘growth’ funds and small-mid-market buyouts.

* For a full account of Joseph Needham’s discoveries about Chinese inventions, an easy read is his biography, ‘The Man Who Loved China’, by Simon Winchester. Published by Harper Collins, New York, 2008.

– G.B.

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