Investors see China regulatory turbulence as short-term - AVCJ Forum

The issuance of strict new rules for private education in July - described by Tony Jiang, co-founder and partner of Ocean Link, which has exposure to the space, as a turning point in China's regulatory landscape - followed tougher scrutiny of anti-competitive behavior by technology companies and a cybersecurity crackdown. The real estate sector is also being targeted.

Public market valuations took a hit and this filtered through to late-stage private deals. However, the impact on early-stage valuations has been less severe.

“In early-stage investments, the valuations are not going down as much. It implies that the market thinks that this is going to be a relatively short-term disruption. They think by the time those early-stage companies get to the IPO stage, the disruption will be smoothed out,” said Marcia Ellis, global chair of the private equity group at the law firm Morrison & Foerster.

Indeed, some investors believe tighter regulation will have long-term benefits, ironing out inefficiencies and inequality in the market.

“This will be some sort of short-term pain, which in the medium to long term will create more opportunities. Anti-monopoly creates more competition; education supervision addresses the aging population and also the declining birth rate,” said Jacob Chiu, a managing director responsible for Asian PE manager research and co-investments at HQ Capital.

He added that HQ remains keen to invest in sectors that are more closely aligned with government policy, such as artificial intelligence, electric vehicles and batteries, and semiconductors. Other panelists noted that adhering to an ESG-style investment approach is another way to avoid pitfalls.

The turbulence - as well as ongoing tensions with the US - has also played havoc with exit plans. Numerous start-ups have abandoned plans to list in New York and are now considering other options. Shaun Lim, a managing director at Hopu-Arm Innovation Fund, suggested that companies would be best served by being patient.

“The best advice is to wait for certainty. As long as the fundamentals are good, and the companies have strong cash flow and balance sheets, in the end, there will be a solution. Start-ups can expect clarity on the regulatory front as well as better valuation conditions,” he said.

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