China GPs emphasize consumer sector opportunities

“Compared to other sectors, consumer has been far less impacted by policy changes. With the government promoting common prosperity, some consumer services that improve life quality are encouraged - and then the anti-monopoly actions have brought better market diversity,” said Robert Chang, a co-founder and managing director at GenBridge Capital.

“The pressure comes from macros, like the slowdown in the economy and uncertainty regarding the COVID situation. These have led to operational issues for some players.”

Private equity investment in China's consumer sector reached USD 8.3bn last year, nearly twice the combined total for 2019 and 2020, AVCJ Research's records show. Emerging domestic consumer brands, which have gained traction by leveraging technology in marketing and distribution, attracted considerable interest.

At the same time, the line between consumer and technology is increasingly blurred. One clear trend within the technology sector, as regulators cracked down on consumer-facing business models from financial technology to education, is a transition towards enterprise-facing opportunities.

Early and growth-stage investment in technology excluding content or services fell to USD 7.1bn in the second half of 2021 from USD 13.1bn in the first half. Over the same period, sector-wide deployment fell from USD 23.7bn to USD 19.3bn, as investors re-focused on areas like hard-tech and deep-tech.

Wendy Zhu, a managing director at AlpInvest Partners, observed a slowdown in IPOs - and in IPO pricing - could make late-stage growth investment less attractive. This would likely take some of the heat out of the consumer sector.

Chang added that valuations in the technology-facing consumer space have already experienced substantial declines. This is a consequence of traditional technology, telecom, and media (TMT) investors turning their attention to B2B models.

“Competition is much less intense than before, and we are seeing more rational expectation on the founder side. It will be a great investment window this year and next year because we can negotiate some good deals,” he said.

It is widely expected that hard-tech and deep-tech start-ups will pursue domestic rather than offshore listings, given the sensitive nature of their intellectual property. This may give impetus to renminbi-denominated fundraising, but it isn't reflected in the data. Local currency fundraising continued a multi-year decline in 2021, while commitments to US dollar vehicles increased.

Nevertheless, Richard Nie, a partner at King & Wood Mallesons, claimed to be seeing more activity.

“One of our clients, a US VC firm active in China for the last 25 years, has always resisted the idea of raising a renminbi fund because they were not willing to deal with the very different domestic LPs," he said. "But last year they seriously considered the idea ... They feel like they must do this as a strategic move because of the policy changes."

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• Topics
• Greater China
• Consumer
• GPs
• LPs
• Fundraising
• Expansion
• Early-stage
• Technology
• TMT
• China
• hard-tech
• deep-tech
• HKVCA
• GenBridge Capital
• AlpInvest Partners N.V.