Fund focus: Qiming picks its moment

Timing is everything in fundraising – especially in the world of China VC, which largely focuses on a technology sector that has been buffeted by regulatory headwinds domestically and volatile listed equities globally.

Qiming Venture Partners got in and out quickly with its eighth fund, wrapping up commitments early in the year, prior to the war in Ukraine and some of the worst listed market corrections. A USD 2.5bn final close wasn’t announced until this week because LPs needed extra time to complete documentation.

“We started early in the year and received most of our commitments and reached fund target within four months,” said Nisa Leung (pictured), a managing partner at the firm. "We are fortunate to have many existing investors who believe in us and our team and continue to step up in this fund.

Several other factors worked in Qiming’s favour, not least its status as a proven China manager of more than 15 years’ standing. Leung noted that, with COVID-19 limiting travel over the past two years – and China still only accessible to those willing to spend time in quarantine – LPs have tended to focus on re-ups or only back new GPs where there is a high level of familiarity and conviction.

Qiming has scaled up substantially from the previous vintage, which saw it raise USD 1.2bn in 2020. There are now two funds: a core pool of USD 1.55bn that will be deployed in early and growth-stage healthcare and technology and consumer opportunities; and a parallel healthcare-only vehicle. Separately, the firm closed its seventh renminbi-denominated fund on CNY 4.7bn (USD 701m).

The same LPs are in each part of the US dollar fund, so the parallel vehicle essentially allows them to double-down on healthcare deals that also feature in the core pool. Various re-upping investors took the opportunity to put more capital to work than last time, while the larger corpus brought Qiming to some LPs that previously couldn’t participate for minimum cheque size or capacity reasons.

“Given the bigger fund size, some new institutional investors who have followed us for a long time are able to come into this new fund,” said Leung. She added that endowments and foundations, fund-of-funds, and sovereign wealth funds continue to comprise the bulk of the LP base.

Areas of activity

In Fund VI, the split was 60% technology and consumer and 40% healthcare. Fund VII was expected to be 50-50, although healthcare was set to take most of the 25% earmarked for growth rounds. At the same time, there has been a shift within the technology and consumer allocation. Fund VII was more hardcore technology than consumer-facing technology and the same is expected of Fund VIII.

This is only partly tied to the 2021 crackdowns on consumer internet companies as well as technology-enabled platforms in areas like education. While concerns about regulatory intervention in consumer-facing technology were real, Qiming was already seeing interesting opportunities in other parts of the sector. 

"We were an early investor in companies like Xiaomi, Bilibili, Zhihu and Meituan, and they listed. Around five years ago, we started seeing great opportunities in hardcore tech including artificial intelligence, software, and semiconductors, and we started investing in this space," said Leung.

Nevertheless, addressing investor concerns about regulation was key to the fundraising process. Qiming still plans to invest in consumer-technology companies, albeit focusing more on emerging domestic brands than internet platform plays. However, the overriding message was that the portfolio would be balanced, with healthcare and hardcore technology most prominent.

Across China, minority investment in technology reached USD 43.7bn last year, the second-largest annual total on record, but momentum began to fade in the middle of 2021. The drop-off has been most precipitous in consumer-facing segments: USD 12.5bn out of USD 23.9bn in the first half; USD 4.6bn out of USD 19.8bn in the second; and USD 1.8bn out of USD 16.3bn in the first half of 2022.

Biotech, the mainstay of early and growth-stage activity in China healthcare, is also on the slide. Having reached new highs in 2020 and 2021, investment plummeted from USD 4.7bn in the second half of 2021 to USD 2.7bn in the first six months of this year, according to AVCJ Research.

Leung, who co-leads Qiming’s healthcare team, retains a positive outlook on the segment. The firm’s investment pace has not dropped off in 2022, with 40% of investments made across all sectors in the first four months of the year constituting follow-on rounds for existing portfolio companies.

“High potential companies [in healthcare] continue to receive multiple term sheets and step-up valuations from previous rounds. Others are raising money at flat rounds," she said.

"In the last couple of years, non-traditional healthcare investors have piled into the sector globally, so we saw a big increase in deal flow and valuations. Similar to other cycles, this is followed by a retraction in investments and potentially M&A for companies that are unable to survive independently."

It remains to be seen whether these start-ups have anything worth buying. The biotech funding boom prompted a surge in in-licensing deals with high upfront payments and royalties. Leung believes it will be difficult for many late entrants with such business models to be economically sustainable, particularly since many of these startups do not have the economies of scale and talent of established players like Beigene and Zai Lab.

Qiming has supported in-licensing success stories, notably Zai Lab, which now trades in the US and Hong Kong. However, in-licensing was always a means to an end: Zai Lab used the revenue to support innovative drug discovery and development. “It would be hard to enter in-licensing today if the team does not have a track record of doing development all the way through and commercialization capability,” Leung observed.

An eye on exits

Of the venture capital firm’s 30 IPOs since the beginning of 2020, 23 have been in the healthcare space, with Hong Kong and Shanghai’s Star Market the most active exchanges for biotech start-ups. Hong Kong has since run dry, but mainland bourses are still delivering a trickle of listings as well as strong stock performance for companies that are ramping up revenue and hitting targets.

“The market is oversold now, and the IPO window is temporarily closed. XBI [a US biotech index] is down over 50% as well as this biotech boom cycle has outlasted many in the past," said Leung. "If the market returns early next year, there will be more IPOs. In the meantime, companies are focused on operations, recruitment, and achieving milestones. We’ve seen strong growth in some of our portfolio companies even in the past year.”

Given the ease with which healthcare companies go to Hong Kong and the challenges around taking certain technology start-ups public offshore, the US markets are currently less of a priority. This is not a problem provided liquidity is available and valuations make sense – and Qiming’s commitment to early-stage investment means paper-based gains haven’t been wiped out by corrections.

“Over 65% of our investments since inception have been first round in, seed or Series A," said Leung. "We are an early-stage investor. We invested in very few pre-IPO deals so even with public market volatility; we are still in good shape.”

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• Topics
• Greater China
• Fundraising
• GPs
• Healthcare
• Technology
• Venture
• Renminbi fund
• China
• Qiming Venture Partners
• Pharmaceuticals