China investors see primary, secondary valuation mismatch - AVCJ Forum

Investors are wary of China's technology sector. What began with Ant Group's aborted IPO last November has escalated into anti-monopoly investigations targeting top domestic internet companies, a fundamental redrawing of the commercial guidelines for private education, and a sweeping data privacy law that has complicated US IPOs by consumer-facing internet players.

Daisy Cai, a general partner and head of China at B Capital Group, pointed out that many Chinese growth-stage technology start-ups are over-valued compared to their benchmarks in the hard-hit secondary market. The CSI Overseas China Internet Index, for example, peaked at 14,735 points in February; it is now languishing at around 7,000.

"When investors can't make money in the secondary market, it will definitely affect the confidence of the primary market. There will be a valuation adjustment in the primary market, although it often comes with a delay," Cai said.

Doris Guo, a partner at Adams Street Partners, endorsed this view. She added that some overseas LPs may raise their allocation, seeing opportunity in reduced primary valuations. But most overseas LPs are expected to maintain their original long-term plans.

Speaking on the recent regulatory changes, investors noted that China's efforts to ensure personal data security and enhance social equality were in line with global trends, although the way it has been implemented is different. In the US or Europe, there would be significant back-and-forth discussions with market participants before implementing a major regulation change. In China, it's only a decision to be notified.

However, investors were positive on China from a long-term perspective, noting that many Chinese enterprises are doing well in overseas markets. This is one way that investors can reduce the influence of geopolitics and industry regulation in one market.

"We have been in the country for 15 years and have experienced at least 10 regulatory supervisions in different industries. Supervision usually lags behind the development of the industry. There are many cases of bad money driving out good money before the introduction of supervision. So, most of the supervisions in the past have actually created a more orderly and healthier environment, and truly high-quality companies have emerged to gain a larger market share," Guo said.

"China has now entered a stage where the government has goals other than GDP growth. It requires industries or enterprises to take more social responsibilities, which will further reduce transaction costs and social costs."

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