China-focused private capital fundraising tumbled to a new low of US$3.4 billion in the second quarter as investors turned their backs on the world’s second-largest economy, citing economic headwinds and exit uncertainties, according to data provider Preqin.
The latest tally was less than a tenth of the average quarterly amount of US$45 billion between 2019 and 2021 as geopolitical tensions, weak market performances and liquidity constraints weighed on investor sentiment towards China, Angela Lai, lead author of Preqin’s Asia-Pacific (APAC) quarterly report published on Wednesday, said in an interview.
The asset classes covered include private equity, venture capital, private debt, real estate and infrastructure.
“China-focused funds are still having a very challenging time,” said Lai, who is also the head of APAC for valuations and research insights at Preqin. “We are talking about coming down from such a high level … it’s almost like there is a limited downside you can go further from here.”
Total private capital raised for China dropped consecutively for four quarters after a slight uptick to US$10 billion in the second quarter of last year, according to Preqin.
“There is still not a lot of willingness to add exposure to the China market,” said Lai. Foreign investments have not been allocated to China as much as before, putting pressure on the overall deal environment and valuations, she added.
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China posts 4.7% second-quarter growth, lower than expected
China posts 4.7% second-quarter growth, lower than expected
Liquidity is also a big concern for China’s private capital market investors. “While you can still make deals in China, it seems like the exit could be even less certain than before,” said Lai. “Investors want to have good expectations, some predictability as to when they can expect [to get back] their money. That time frame and the level are very difficult to project.”
China-focused private equity funds stood at US$300 million in the second quarter, a 85 per cent slump from the previous quarter. Meanwhile, APAC-focused private equity funds rose 29 per cent to US$14.8 billion in the same period.
The pan-Asia funds usually cater to different market opportunities within the region and provide diversification benefits, Lai said.
Venture capital fundraising was the only bright spot in the Chinese market in the three months to June, with the amount increasing to US$3.1 billion, from US$1 billion in the first quarter. The majority came from HongShan, previously known as Sequoia Capital’s China unit, for a US$2.5 billion fund that was reportedly backed by the Hangzhou city government.
Lai said sufficient domestic investments and the Chinese government’s support for start-ups contributed to the venture capital fundraising performance.
“Our outlook for China private capital markets is on the conservative side at the moment because of the still-weak investor interest,” said Lai. “We need to have more interest to drive deal flow, activity and exits and valuations, etc.”
Japan and India stood out as preferred markets in APAC, according to the Preqin report.
“Since the beginning of 2022, Japan has steadily captured a larger share of the APAC buyout deal-making market, fuelled by the low yen and investors’ interest in the stable nature of its private markets,” Lai said.
Investors have also been drawn to India’s booming buyout and infrastructure markets, according to the report.
“There’s still quite a lot of new investments going into relatively greenfield type of real estate [in India],” said Lai. “And we see there’s a good appetite to finance these constructions.”