China’s private equity and venture capital market has caught a cold as liquidity dries up in the first half of this year. But there may be a cure, or at least an alleviator.
Data from Asset Management Association of China shows that some Rmb1.3 trillion ($191 billion) was raised by Chinese private equity and venture capital funds between January and June – some way off the Rmb2.1 trillion recorded in the same period of last year.
But look more closely and it's clear that some sectors are faring better than others. Healthcare, notably, saw $5.5 billion of new money flood over the same six-month period, more than doubling the previous year's first-half total, according to a report by Chinese healthcare data provider vcbeat.net. The number of deals over the two periods also increased to 295 from 241.
As one of the market's traditionally defensive sectors, but backed also by the growth potential that can be inferred from China's ageing demographics and rising incomes, specialised healthcare funds are showing that they can still access funding even as investors grow more risk-averse.
One example is Chinese venture capital firm Long Hill Capital. On Tuesday it said on its official WeChat account that it had closed a $265-million round of fundraising in less than three months for its Changling Capital II healthcare-focused fund. That brought the fund’s total assets under management to roughly Rmb3 billion ($441 million).
Another case in point is Allcure, an oncology-focused information technology platform based in Beijing, which announced its Rmb700 million series-B round of funding, also on Tuesday.
For those wanting capital, both funds and startups, it's getting tougher out there, but for healthcare in China investor interest remains intact, says Jiang Xiaodong, a managing partner of Long Hill.
"Our limited partners are less concerned [about liquidity] because of the fund’s consistent investment focus [on healthcare],” he told FinanceAsia in a telephone interview.
In any case, less hot money in the Chinese private equity market generally would likely lead to a healthy correction in valuations; startups that survived the shakeout would be the ones showing true value and the ones most likely to flourish.
Jiang cited Airbnb and Uber as two prime examples, both of which were founded in the immediate aftermath of the global financial crisis, with the former established in 2008 and the latter in the following year.
TECH BUT NOT BIOTECH
With its latest fundraising completed, Long Hill Capital can now switch to seeking potential targets, ideally taking advantage of the expected market correction.
The "fund won't slow down" Jiang said, targeting various healthcare sub-sectors with innovative business models that can ride the wave of technological disruption and tap into the medical demands of China’s massive and increasingly moneyed population. But, curiously, not genomics or biomedical engineering.
“Biotech is not our specialty,” the venture capitalist said.
According to Jiang, unlike startups in other sub-sectors, biotech for instance, which may be considered as cash burners due to large amount of research and development spending, most of the fund’s portfolio firms have been growing fast, with approximately “2/3 being able to deliver positive cash flows.”
GST Clinics, a company Long Hill participated in through its series-A funding, is an online-to-offline traditional Chinese medicine clinic operator that well fits in the fund’s investment theses.
“The target’s revenue is generated from the offline operation of its chain clinics around the country, but with information technology that helps identify potential consumers more precisely, the improvement of operational efficiency is directed from online to offline,” Jiang said.
Following five rounds of funding, GST has raised about Rmb1.7 billion so far and is now valued at Rmb7 billion. In 2016 and 2017, the traditional Chinese medicine clinic brand delivered more than Rmb300 million and Rmb1.1 billion of revenue, respectively.
“Healthcare is usually categorised as a traditional sector, but with technology there are always startups that can come up with innovative solutions to speed up the upgrade of this traditional industry,” he said.
And rather than startups dedicated to disruptive medical breakthroughs but far away from making profits, those innovators with advanced business models and backed by China's huge consumer base are more likely to attract Long Hill with the capability to deliver positive cash flows quickly after funding, sometimes even as soon as “six to nine months”.
This story has been updated with the correct figure for Allcure's series-B funding round