2Q analysis: Trouble in China

1) Investment: A shift in tech momentum

Private equity investment in Asia remained robust in the second quarter of 2021, consolidating a trend of rapid deployment that began towards the end of last year. The $58.7 billion put to work represents a slight decline on the $59.9 billion invested during the three months prior; both are comfortably above the pre-COVID-19 average, even though the 2020 final-quarter total of $71.9 billion remains an outlier.

And technology continues to be the mainstay, accounting for 48% of capital deployed across the region, according to preliminary data from AVCJ Research. This compares to 45% in the first quarter and 32% in the final quarter of 2020. In each period, early and growth-stage activity was responsible for more than $0.80 of every dollar committed.

That is where the similarities end. For the most part, technology investment in Asia has been a China-driven phenomenon. This was certainly true of the post-COVID-19 surge in deal flow. China absorbed about three-quarters of the capital that went into early and growth-stage rounds in the last three months of 2020 and nearly two-thirds in the first three of 2021. This fell to one-third in the second quarter.

While China dropped off a cliff – from $14.6 billion to $8.3 billion – India and Southeast Asia surged to record highs. These two geographies surpassed China in early and growth-stage investment for the first time in January-March 2020, when the economic impact of the pandemic had yet to spread beyond Chinese borders. It happened again, for very different reasons, in April-June 2021, with India and Southeast Asia attracting $7.5 billion and $4.4 billion, respectively.

There are several forces at work. First, efforts by Chinese regulators to restrain the technology sector appear to have given investors the chills. An antitrust investigation that initially focused on Alibaba Group has widened to encompass more than 30 businesses, including Tencent Holdings, ByteDance, JD.com, Didi, and Meituan. Meanwhile, online tutoring platforms face closer scrutiny and Chinese internet companies listing in the US have been targeted for violating personal data collection rules.

The CSI Global China Internet Index edged above 14,400 points in mid-February; it now below 9,000. The Hang Seng Tech Index has plummeted from nearly 11,000 points to less than 7,500. Most of the Chinese technology companies that have gone public in the US this year are trading below their IPO prices.

Growth-stage funding has understandably taken a hit. In the final quarter of 2020, $11.1 billion was committed to 13 rounds of $300 million or more; in the first quarter of 2021, $8.8 billion went into 14 deals. There were only six between April and June, with $3.5 billion put to work.

Second, India’s B2B services businesses are raising capital like never before. Part of this is the global software-as-a-service (SaaS) boom. BrowserStack became India’s most valuable SaaS property in June, closing a $150 million round at a $3.5 billion valuation. It is one of several such companies – typically founded by local entrepreneurs who are based in the US because they primarily serve US clients – to achieve or consolidate unicorn status. Others include Druva, ChargeBee, Zenoti, and Zeta.

B2B has also come to the fore through supply chain marketplaces that are intended to streamline the country’s fragmented industrial sector. Start-ups like Moglix and Ofbusiness help small and medium-sized enterprises (SMEs) with procurement, financing, marketing, and logistics, removing the layers of offline intermediaries that populate these processes.

Third, growth-stage investment in India and Southeast Asia has been spurred by a revitalization in exit expectations. Several Indian SaaS companies have listed in the US, while food delivery giant Zomato is looking to complete what would be the country’s fifth $1 billion-plus PE-backed IPO. Southeast Asia has been energized by ride-hailing player Grab’s impending US listing via a merger with a special purpose acquisition company and expected domestic offerings by Indonesia’s GoTo and Bukalapak.

India saw five rounds of $300 million or more in the second quarter, matching the record number set in the prior three months. The Southeast Asia total rose from two to five, also a record high.

It is telling that, of the 20 largest investments from April-June, only four are China growth deals, down from seven in each of the previous two quarters. Over the same three periods, private equity investment in China – across all sectors and strategies – has fallen from $40.3 billion to $31.6 billion to $26.2 billion.

Unusually, the drop-off in early and growth-stage technology activity was to some extent counterbalanced by three buyout deals that rank as the largest PE investments in Asia for the quarter. They are the $5.7 billion take-private of US-listed 51job; the $3.3 billion acquisition of Soho China, a bet on post-pandemic real estate and an event for founders looking to diversify overseas; and the $2.2 billion carve-out of Reckitt Benckiser’s local infant formula and child nutrition business.

The only major markets to register an upturn in investment activity on the previous quarter were India, Indonesia, Singapore, and Vietnam. While India can point to a string of unicorns, the others each boast at least one deal that is a technology play or a technology proxy.

Singapore-headquartered Trax, which uses computer vision technology to help retailers link sales to in-store and on-shelf positioning, secured a $640 million Series E round; J&T Express, a courier company buoyed by the rise of e-commerce, secured $1.8 billion; and The CrownX, Masan Group’s bid to modernize and digitalize grocery retail in Vietnam, received $400 million.

2) Fundraising: Slow quarter, China story

The swings in Asia’s headline fundraising total are very much a function of who is in the market in a particular quarter. With LPs still flocking to managers that offer the comforts of a global brand or an established local name, the ever-depleting number of partial and final closes is usually papered over by a couple of big hits.

In this respect, the second quarter of 2021 was much like the first. The January-March period was slightly more respectable than it seemed at the time as previously undisclosed fundraising activity pushed the total to $27.2 billion from 135 closes. KKR was the brand-name standout, finishing off its $15 billion pan-regional fund, supported by China stars Lilly Asia Ventures and Source Code Capital.

The unwanted title of fewest fundraises in eight years now passes to the second quarter – although perhaps it too will see a retrospective upgrade. In all, 84 managers achieved partial or final closes. Approximately $22.3 billion was committed, the second-lowest quarterly total since 2015. The first three months of 2020 – when LPs were momentarily caught in the headlines of an unfolding pandemic they feared would trigger a repeat of the global financial crisis – remains on the bottom rung.

Only eight managers raised $500 million or more, led by China’s Boyu Capital, which took a matter of months to reel in $6 billion for its fifth fund, up from $3.5 billion in the previous vintage. AVCJ understands the corpus was in fact split between two vehicles, a $5 billion flagship fund and a $1 billion pool for earlier-stage private equity investments.

CPE – formerly known as CITIC Private Equity – reached a first close of $1.8 billion, against a target of $3 billion, for its fourth fund. Boyu and CPE formed the vanguard of larger China managers in the market, alongside FountainVest Partners and Primavera Capital Group. FountainVest is targeting $2.8 billion, with a hard cap initially set at $3.2 billion, while Primavera is looking to raise $4 billion.

With Orchid Asia also hitting a first close of $1.1 billion on its latest vehicle – the manager wants $1.6 billion in total – China was by some distance the most active fundraising destination. It collected 71% of the regional total, even though the renminbi-denominated space is challenging for almost any manager that isn’t raising capital for a strategic industry. Yinke Private Equity ticked that box, raising RMB10 billion ($1.57 billion) for technology and healthcare investments.

Yinke was one of nine China-focused vehicles among Asia’s 10 largest fundraises for the quarter, alongside Boyu, CPE, and Orchid. The others are venture capital-focused. Two were raised by 5Y Capital – it closed $1.7 billion for early and growth-stage vehicles, plus a renminbi pool of RMB1.9 billion – and another by Unicorn Capital Partners, which collected $450 million for its latest fund-of-funds.

The Blackstone Group was the sole large-cap pan-regional representative. The firm hit a first close of $3.1 billion on its second Asia fund. The overall target is $5 billion.

3) Exits: Climate of uncertainty

Three months ago, the primacy of US stock exchanges as destinations for private equity-backed Asian companies appeared secure. Now, at least in a China context, the notion of crossing the Pacific is being questioned.

Even as the New York Stock Exchange and NASDAQ generated the largest share of IPO proceeds from Asian businesses with financial sponsors in January-March, topping the charts for the first time in seven years, it wasn’t just about China. There were significant listings by companies out of South Korea and India. But there was a distinct China theme: as the rise of Shanghai’s Star Market was stymied by a spate of high-profile withdrawals, the US was attracting Chinese start-ups at a frenetic pace.

This continued into the second quarter. Once again, 10 PE-backed Asian companies listed in the US. They raised a combined $8.8 billion, not far short of the first-quarter total of $9.2 billion. This fueled another robust three months for the region as a whole – $24.4 billion compared to $25.8 billion in January-March – but mainland China reclaimed the top spot among the listing destinations.

However, the US strengthened its grip on China’s technology sector. In the first quarter, four companies raised $1.8 billion in the US. Hong Kong dominated with $5.9 billion, but most of that came from a single offering. In the second quarter, the New York Stock Exchange and NASDAQ welcomed seven China technology players, and the $7.3 billion raised overwhelmed the mainland and Hong Kong, which saw $442 million and zero, respectively. Since June 2020, there have only been two China tech IPOs in Hong Kong.

Against this backdrop, the Cyberspace Administration Office made its move. Four of the 10 largest IPOs from the quarter were by Chinese companies in the US. Three of them – ride-hailing giant Didi, online trucking business Manbang, and recruitment platform Boss Zhipin – have been targeted for breach of personal data collection rules. Didi was forced to suspend new registrations within days of going public.

It is unclear whether this is part of a wider campaign to clip the wings of big tech or early application of a Data Security Law, which was passed in June and is intended to stem the potential leak of sensitive information overseas. Either way, the regulator has since decreed that companies in possession of data pertaining to at least one million users must undergo a security review before listing on foreign stock exchanges. A drop-off in US-based activity seems likely in the third quarter.

Meanwhile, the broader private equity exits picture in Asia remains relatively bleak. Approximately 100 transactions worth an aggregate $13.2 billion were announced in the second quarter, down from $18.3 billion for the prior three months.

With trade sales still weak – most assets are going to local strategic players or financial sponsors with resources across the region – Asia has yet to demonstrate an ability to return to pre-COVID-19 levels. Average proceeds for the eight quarters ended December 2019 were $24.3 billion.

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• Topics
• Greater China
• Southeast Asia
• South Asia
• Fundraising
• Buyouts
• Expansion
• Technology
• IPO
• Regulation
• Trade sale
• Funds
• China
• India
• TMT
• Growth capital