A. Economic Environment and PE/VC Market Overview in 2020
Before 2020, the year 2019 had been regarded as the trough of a cycle within the PE/VC industry and people had expected that the following year 2020 would be a turning point and the overall investment amount and the number of transactions could rise up. However, the COVID-19 outbreak emerged as a black swan and stopped that turnaround. China's GDP growth rate went negative for the first time in decades for 2020 Q1, resulting in the number of transactions in the market slumping to the lowest point since 2015 Q1. With the pandemic having eased up in China through Q2 and Q3, China's GDP growth rate has been inching up and so has the PE/VC market, evidenced by increasing investment amount and number of transactions compared with that of 2020 Q1.
On the other hand, some new laws/regulations were promulgated and some legislative drafts were out for public comments, including the Foreign Investment Law (effected from January 1, 2020), the Special Provisions on the Sale of Shares of Listed Companies by Venture Capital Fund Shareholders (Revised in 2020) (the “Special Provisions”), and the Circular on Seeking Public Comments on the Several Provisions on Strengthening the Regulation of Private Investment Funds (Draft for Comment) (the “Several Provisions”). Meanwhile, the registration-based IPO system which was first applied in the Shanghai Stock Exchange (SSE) STAR Market, initiated its pilot in mid-2020 in the ChiNext Market. The Special Provisions, the Several Provisions, together with the trials of a registration-based IPO system and other supporting regulations and measures, indicate more stringent supervision and regulation by the authorities on fundraising, and encourage capital investment into technology and innovative enterprises, early-stage enterprises and small-to-medium size enterprises.
B. PE/VC Insights and Trends
As of the end of Q3, factoring the negative impact of the pandemic, the equity investment market of China recorded a total of 5,467 deals in the year 2020, a 17.1% decline compared with the same period of 2019. However, the total amount of funds involved increased 10.8% by comparison with that of last year, which shows the market’s confidence in China's economy and the investment opportunities arising out of such steady growth.
The silver lining of the pandemic concerning the PE/VC sphere is that it actually leads to a soaring interest in the biomedical, healthcare and medical device areas, corroborated by the vast amount of money invested and sheer volume of deals in this sector. Another sector that has drawn investors' attention is online education which has developed rapidly during the epidemic, with massive number of people working or studying from home.
Consumption has always been one of the hot areas in the Chinese PE/VC market, but particularly, fresh food e-commerce went into the spotlight during the time when almost everyone was under lockdown at home, and has continued to be one of the most popular targeting areas in 2020 for the investors in China. Moreover, thanks to the maturing of several new technologies such as 5G, cloud computing, AI and VR/AR, the production methods and broadcasting channels of the traditional entertainment industry have been further enriched, which boosts the investors’ enthusiasm for investing in the industry, including the live-streaming business, which is regarded as one of the emerging areas with huge investment potential.
For the first three quarters of 2020, RMB funds (including early-stage investment, VCs and PEs) have raised around CNY573.4 billion, decreasing about 23.3% from 2019 Q1-Q3, while USD funds (including the same as above) have raised around CNY130 billion, gaining an increasing rate of 6.3% compared with the first three quarters of last year; still, the total amount of money and the number of funds raised reduced significantly, a trend that started from the year 2019 and has been lasting till the present. While more transactions in the China PE/VC market have still been consummated by RMB funds during 2020 Q1-Q3, the percentage of the total number of deals closed by USD funds has increased. It is anticipated that owing to the promulgation of the Foreign Investment Law and other laws, regulations and policies that the Chinese government has announced in order to attract and to relatively loosen the limits on foreign investment, the USD funds may participate more in China's PE/VC transactions.
C. PE/VC Market Opportunities
With pandemic impacting the world, China seems to be one of the few countries to recover from that, keeping the economy growing again and maintaining to some extent the normal daily life of its citizens. The Chinese government has pointed out that China still faces uncertain situations and problems that are likely to exist in the medium and long run, and urged the country to accelerate the establishment of a "dual circulation" development pattern in which domestic reliance (the second circulation) plays a leading role while global integration (the first circulation) remains its extension and supplement. With this new strategy, and thanks to a growing population of millennials who have been raised with sufficient wealth in the family, had their childhood spent in a rapidly growing Chinese economy and are under the influence of globalisation, it is foreseeable that more investment opportunities would appear in the consumption sector, including but not limited to, domestic fashion brands, domestic skincare and cosmetics, luxury goods and high-end shops.
The initial success of SSE Star Market, along with the new strategy of “dual circulation”, also implies the country’s emphasis on the science and technology sector. In addition, the Sino-US trade disputes in these years have demonstrated the importance of technology independence in core high-tech areas, such as chips, semiconductors, cloud computing/services, 5G, IDC and consumer electronics. With an increasing number of the US-listed China Concepts Stock returning to China's domestic capital markets, more venture capitalists and private equity players would like to be involved in this, particularly in the science and technology spheres.
In November 2020, China entered into a Regional Comprehensive Economic Partnership (“RCEP”), one of the world’s largest regional free trade agreements, with fourteen neighbouring countries, including Japan, South Korea, New Zealand, Australia, and ten ASEAN member countries. RCEP lowers the tariffs within the region, which increases the value of operating within Asia, and provides a uniform rule of origin which makes it easier to pull production away from mainland China while retaining access to it. It is forecast that China’s entrance into RCEP would obviously benefit the cross-border e-commerce, export trade, transportation and logistics; be positive news to China’s traditionally advantageous textile industry; and moreover favour electrical appliances, consumer electronics and the whole production industry.
Overall, the private equity and venture capital investment in China will continue to prosper thanks to the steady growth of the Chinese economy and the promising new investment areas that keep emerging.