From Red Envelopes to Private Equity

China’s appetite for overseas investment over the last decade has been nothing short of voracious. The magnitude of deal flow and dollar flow has been staggering—rising tenfold from just $22.6 billion in 2007 to $246.7 billion in 2016. But such rapid growth in outbound investment has not been spread evenly across industries. As I have written elsewhere on the Two Fen blog, Chinese outbound foreign direct investment (OFDI) in technology sectors had already overtaken investments in traditional energy in 2014.

But this shift did not happen in a vacuum. The enablers behind this change of taste in China’s outbound investment portfolio is a group of investors that has risen to prominence in recent years: private equity (PE) players and venture capitalists (VCs). The Chinese PE/VC industry is only a teenager when compared to more mature investor communities in the United States, having burst onto the scene only around the turn of this century, according to China First Capital’s recounting. Yet in the ensuing 16 years, the PE/VC industry in China has ballooned in both size and volume from next to nothing. Today, mainland China has in fact surpassed Japan as the largest PE/VC investor base in Asia, home to 27% of Asian PE/VC players (see Figure 1).

Figure 1: Regional Distribution of Asian PE/VC Investors  
Source: Preqin.

Still, although Chinese PE/VC firms are relatively young, they are actually populated by old hands in the finance industry. All six founders, co-founders, and CEOs of the five largest Chinese PE/VC firms were educated in the United States and returned to China to set up their funds. With deep industry knowledge and extensive networks across borders, this class of Chinese investors is especially active in making large deals—that is, equity investments of over $100 million. According to the Bloomberg China Deal Book, since January 2016, eight of the eleven $100 million deals emanating from Chinese sources were led by this coterie of Chinese investors.

And this Chinese industry has been growing, in spite of an overall global decline in PE/VC investments. In 2016, Chinese PE/VCs raised $73 billion of total funds, a 48% jump from the previous year, while the rest of the world dropped slightly from $298 billion to $263 billion. Their fundraising prowess has likely given this group of Chinese investors more ammunition and a competitive edge. In 2016, for example, they doled out $223 billion, accounting for more than 70% of global PE/VC deals (see Figure 2).

Figure 2. Chinese PE/VC-led M&A Vs. Rest of the World (in $ billion)
Source: PwC and author’s analysis.

These changing dynamics have important implications for global capital, entrepreneurs seeking growth capital, and local communities and US firms looking for partnerships with foreign investors. Having arrived quietly on the scene, Chinese PE/VC firms have already become a global force in bolstering Chinese outbound investment and deploying capital. And their influence is likely to grow in coming years.