5Y seeks $700m for latest China VC fund

The hard cap has been set at USD 800m, according to two sources close to the situation. They added that the data room opened in July and LP due diligence sessions began around the same time.

5Y Capital Evolution Fund III is the firm’s seventh venture vehicle overall, but its third since formally separating from Morningside Group, the family office of the Chan family, founders of Hong Kong property developer Hang Lung Group. Prior to the previous fund close, the firm changed its name from Morningside Venture Capital to 5Y.

Nearly USD 2bn was raised in 2021: US dollar-denominated venture and growth funds of USD 700m and USD 1bn, respectively, and a renminbi pool of around CNY 1.9bn (USD 290m). This followed a USD 1bn fundraising effort in 2018 where the core venture vehicle was accompanied by sidecars for growth rounds and co-investment.

The 2021 vintage was the first in which the VC fund was accompanied by a standalone growth fund. The deployment pace of the two vehicles is now out of sync – nearly 75% for venture, less than one-third for growth – so they are not being launched simultaneously in the new vintage, one source explained.

Raising capital for China funds is proving especially challenging as LPs move to risk-off mode and many US investors scale back commitments to the country amid geopolitical tensions.

About USD 21.5bn was committed to US dollar China funds across all strategies last year, up slightly on 2021, but HongShan (formerly Sequoia Capital China) and Qiming Venture Partners together accounted for nearly 60% of the total. In 2023 to date, USD 6.1bn has been raised, according to AVCJ Research.

A common characteristic of funds that have achieved final closes is a reduced reliance on US investors. For example, Vertex Ventures China closed its fifth fund on USD 390m last month, sourcing all the capital from Europe, Southeast Asia, and China-headquartered LPs. There was no marketing in the US.

US investors have traditionally featured prominently in 5Y’s global LP base comprising sovereign wealth funds, endowments, foundations, family offices, and fund-of-funds. The firm expects a strong re-up rate, including from US LPs currently engaged in due diligence, one source said. The Middle East, Europe, and Asia are likely to account for the bulk of new relationships.

Richard Liu and Ken Shi, 5Y’s founding partners, started out making technology, media, and telecom (TMT) investments for Morningside in 1999. They became independent in 2007, raising a USD 150m fund with a sizeable anchor commitment from Morningside. 5Y now has USD 5bn in assets under management and continues to back start-ups with the potential to bring about paradigm change.

“Such change might be very unclear and non-consensus in the early stages. It may begin to make sense only several years later. But once embraced by the mass market, it leads to huge innovation and makes a significant impact on society,” Liu told AVCJ in 2021.

He identified several key phases in 5Y’s history. The first was mobile internet, which prompted 5Y to make early investments in smart devices brand Xiaomi and short video platform Kuaishou. Both went on to list in Hong Kong, with the firm said to have generated an 886x return on its initial Xiaomi investment.

The focus then shifted to artificial intelligence (AI) and robotics – 5Y began tracking AI-enabled trends in 2014 – and from there to autonomous driving and smart cars. Standout investments include electric vehicle (EV) manufacturer Xpeng, automotive AI computing platform Horizon Robotics, and autonomous driving technology player Pony.ai.

AI is behind a similar paradigm change in biotech, facilitating the adoption of new drug discovery methods. This prompted 5Y to incorporate ITBT – IT plus biotech – as a key strategy several years ago.

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• Topics
• Greater China
• Fundraising
• GPs
• Venture
• Technology
• China
• Fundraising
• 5Y capital
• TMT