Fund focus: Morningside scales up for growth deals

With Chinese technology companies putting off IPOs in favor of raising ever-larger private rounds at ever-higher valuations, the investment cycle for VC firms has become longer than before. Morningside Venture Capital has responded by positioning itself to target growth and late-stage deals in addition to the traditional early-stage fare.

The VC firm, which was set up by Hong Kong's Chan family - owners of property developer Hang Lung Group - closed its fourth China-focused fund at $660 million in September after three months in the market. The corpus comprises a $400 million core fund, a $200 million special opportunity fund and a $60 million co-investment vehicle. It is considerably larger than its predecessor, which closed at $412 million in early 2014, again spread across a core fund and two side vehicles.

"Our focus is still on early-stage companies and we don't want the later-stage investments to affect our capital commitments to early-stage companies. That is why we have three separate vehicles for different purposes," says Ken Shi, a managing director at Morningside.

The opportunity fund is specifically for follow-on investment s in Morningside's existing portfolio companies. However, in some cases it will be used to pursue separate later-stage deals as well. Capital for the co-investment vehicle came from Chinese entrepreneurs and Morningside's VC networks; it will co-invest proportionally into each deal made by the main fund and the special opportunity fund.

All existing LPs from Fund III re-upped in the new vehicle alongside three new LPs, with commitments from endowments, foundations, pension funds, sovereign wealth funds, family offices in Europe and the US. Fund-of-funds Asia Alternatives Management, an investor in Morningside since Fund I, and US-based Horsley Bridge Partners are among the LPs.

The core fund will typically invest in seed to Series A rounds of $2-5 million, while the special opportunity fund is aiming for investments of $10-15 million in companies that have move from early to growth stage.

"In every investment cycle different themes become popular," says Shi. "In the past one or two years, venture capital flooded into social media, e-commerce and mobile technology. In the new fund, we will concentrate on the concept of shared economy, enterprise software and online healthcare."

Morningside spun out from its family office parent in 2007-2008and launched independent funds, although the Chan family remains an anchor LP. The first fund closed at $150 million in 2008 and the second closed at $225 million three years later.

Currently Morningside has a handful of portfolio companies which are valued more than $1 billion, including Chinese smartphone maker Xiaomi, online real estate platform Aiwujiwu and online healthcare business Guahao.com. Shi sees IPOs in the US as the most likely exit route for these businesses.

For those entering later-stage rounds in technology companies, he also expects valuation pressure to ease. "Valuations will become more reasonable as investors become more rational," Shi says.

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