China venture capital

Cheaper entry valuations and ample exit options are reigniting Chinese VC activity

The Covid-19 pandemic is pushing renewed interest into healthcare sectors, where VC’s are looking for investments that not only survive but thrive under these unpredictable conditions.

Despite a pickup of activity in March, venture capital (VC) financing fell by more than half to $3.8 billion during the first quarter of 2020 compared to the same period last year, according to the Asian Venture Capital Journal. With investors unable to travel or channel check companies, most activity was understandably put on hold.

But as China slowly reopens its domestic transportation networks amid moderating infection rates from the coronavirus, VC’s are looking to resume where they left off before the pandemic. “Although we are doing mostly online calls and preparation work, we are always checking for projects,” Ian Zhu, partner of NIO Capital told FinanceAsia in an interview last month.

Not survivors, but leaders

Amid the pandemic, VC investors are seeking companies in sectors that can outperform. Healthcare related investments top the list, hitting 41 deals that total $1.6 billion during the first three months of this year. Admittedly, “there were some bubble in healthcare investments in the past two to three years,” Nisa Leung, managing partner of Qiming Venture Partners, a Shanghai-based VC which recently announced the closure of a $1.1 billion fund to invest in health and technology start-ups.

Although some “healthcare funds saw half of their investments fail” the coronavirus prolongs interest into the space given China’s long-term demand outlook, as VC’s “always want to fill the gap for China’s medical industry,” Leung said. “There are still so many diseases with few treatments. We want to invest in companies that can fill those gaps.”

Leung believes that VC is focused on vaccines, particularly those in later stage developments.

Attractive valuation prospects

The risk reward profile becomes more compelling as valuations have fallen. “Overall, [the market outlook] is healthier. But we'll have to see what happens as to whether or not the window of opportunity remains open,” explained Leung.

Lower entry valuations are acting as a complimentary draw for VC’s at time as exit options are flourishing. Chinese A-stock witnessed surge in fund raising over the first quarter this year, totalling 51 IPO deals worth Rmb78.1 billion ($11 billion), a 65% increase from the same period a year ago according to accounting firm, Deloitte. 

Aiding the exit strategy are new rules for the Shanghai Stock Exchange Science and Technology Innovation Board (STAR market), also referred to as China’s version of the Nasdaq Composite in New York. Recently, the bourse amended rules for companies deemed essential towards battling the Covid-19 pandemic, relaxing guidelines to allow to expedite the pathway towards listing.

The changes indirectly mirror polices seen in Hong Kong, when in 2018 the exchange amended listing requirements to allow pre-revenue biotech companies to list earlier in their growth stage.

To ensure an investor safety net, however, the Hong Kong exchange requires companies to meet more stringent guidelines, such as research and development spend, according to Mike Suen, partner at international law firm Withers.

At least 15 biotech companies have listed on account of the new rules, according to Suen.

Regardless of Hong Kong or mainland bourse, the appeal to list closer to the Chinese market comes amid the backdrop of renewed political conflicts between Washington and Beijing. Following years of ongoing trade related friction between the US and China, the Covid-19 pandemic is elevating hostility between the two countries.

“The US-China tension will also affect a company’s willingness to choose where they want to list,” said Leung. “Besides, it is not easy to do a roadshow in the US under the current situation. Listing in Hong Kong or Chinese A-share is comparatively easier.”

Investor appetite for Chinese ADRs may also be reaching a new low following the Luckin Coffee scandal where an internal investigation discovered fabricated sales. TAL Education, an education service provided, subsequently admitted it had previously fabricated sales while China streaming platform iQiyi has also been accused of fraud.


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