China fundraising: Venture rising?

The China venture capital fundraising chart exhibits reasonably consistent undulations, at least until recently. Many of the traditional offshore managers came to market with US dollar-denominated funds around the same time, explaining the peaks in 2007-2008 ($6 billion raised), 2011 ($5.9 billion raised) and 2014-2015 ($9.7 billion raised).

They reflect activity in an industry that has been rejuvenated since the global financial crisis by a wave of interest in technology investment. A total of 36 managers achieved partial or final closes in 2007-2008, falling to 20 in 2011 and then rising again to 38 in 2014-2015. Much of the increase can be put down to a new generation of managers created through spin-outs from established players or entrepreneurs-turned-investors who have won enough of a following to raise institutional capital.

LPs like consistency in fundraising, typically a 2-3 year period in between a venture capital firm’s trips to market. The three-year hiatus that preceded the 2011 and 2014 spates of fundraising has narrowed to two years as various GPs raised capital swiftly in 2016. That is likely acceptable to most – as long as it doesn’t create havoc with timing of commitments in particular calendar years – but the top-up funds that have contributed to the increase in capital raised in recent years might be cause for concern.

The justification for these vehicles ranges from a need for additional capital to faster-than-expected exhaustion of the capital in their main funds that was held back for follow-on investments to a desire not to miss out on the additional value created in portfolio companies’ growth rounds. Even allowing for unforeseen expansion in the market, the existence of these vehicles prompts questions about fund size discipline and a GP’s ability to calculate how much capital it can deploy and at what speed, particularly when a cycle appears to be turning.

Renminbi funds arrived on the scene as an added complication in 2010. There have been two peaks: one in 2011 when domestic investors placed their faith in multiple arbitrage via the public markets; and a second in 2016 when fundraising reached an extraordinary $17 billion, of which $14.5 billion went into the first close of a government-backed venture capital fund. It is estimated that there are 1,000 renminbi fund-of-funds in China and 60% of them have state support, with total assets of RMB1.5 trillion.

Remove that one giant fund from consideration and renminbi fundraising in 2016 was down on the previous year. But an increasing number of foreign VC firms are said to be raising (or looking to raise) renminbi: it gives them the flexibility to invest in restricted areas or in companies seeking offshore listings; and there are an increasing number of domestic institutions willing to provide capital.

The question for offshore LPs then becomes one we have heard before in a China context: How do you keep tabs on your portfolio GPs and ensure their interests are still aligned with yours?

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• Topics
• Greater China
• Venture
• Fundraising
• GPs
• LPs
• China