China-focused venture funds struggle for money amid Trump heat

[NEw YORK] The Trump administration's increased scrutiny of college endowments and pension funds backing Chinese firms is creating more roadblocks for venture funds looking for the next big tech winner.

Just six US-dollar funds with exposure to China have sought to raise capital this year, down from 21 last year, according to researcher Preqin. Of those, only one has managed to complete a preliminary closing, compared with 10 last year.

It's a drastic reversal of the venture boom that fueled China's tech industry in the past decade. The US State Department has asked colleges and universities to divest from Chinese holdings in their endowments, warning of potentially more onerous measures on holding the shares. That's on top of a wider campaign to curb Chinese tech champions and slow the money flowing into what are some of the world's largest tech companies, including Alibaba Group and TikTok owner Bytedance.

"A total decoupling of US funding and Chinese technology would also hurt American investors," said JP Gan, founding partner of Ince Capital, which last year raised US$352 million for its first fund with the backing of University of Pittsburgh, Duke University and Carnegie Mellon University.

"US pension funds and endowments have been the biggest beneficiaries from investing in the China growth story," he said.

While some venture funds including DCM and Jeneration Capital were able to close financing rounds this year, those efforts started last year. Preqin tallies the initiation of a fund based on public filings such as with the US Securities and Exchange Commission.

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The coronavirus has hit funds globally. In the US, while fund launches didn't see as drastic a fall in relative terms, new funds with US exposure seeking money fell by 6 per cent to 646. The number of funds that managed to complete an interim closing fell 76 per cent to 14 compared with last year.

Investors raising US-dollar funds to target China's fast-growing tech industry usually seek backing from American pensions or endowments. That backing has helped create some of the biggest private tech firms like artificial-intelligence giant SenseTime Group - currently fundraising at an US$8.5 billion valuation - and Jack Ma's Ant Group, which could be worth US$210 billion based on Bernstein estimates.

Some of the world's biggest private equity funds, including Silver Lake Management, Carlyle Group and Warburg Pincus have pinned their growth on investing in Chinese companies. All three put at least US$500 million in Ant and stand to generate up to 40 per cent returns when the firm goes public.

Chinese companies can still look to listing in Hong Kong to allow investors to realise their gains. And in recent years, investors shaken by volatile markets have increasingly shifted to parking their money with the biggest funds with a proven track record.

The State Department's letter warned endowments it would be prudent to divest from Chinese stocks in the "likely outcome" of a wholesale de-listing of Chinese companies from US exchanges by the end of next year.

The US Senate in May passed a bill that threatens to remove all Chinese companies from US stock exchanges, unless a US accounting regulator is allowed to inspect their auditors. The House of Representatives has also acted on its version of the bill, making it more likely that some form of legislation will be enacted.

Those bills were initiated in the fallout of scandals at Luckin Coffee and TAL Education Group.

The global market value of Chinese firms facing delisting from the US totaled US$1.9 trillion at the end of 2019, according to Will Cai, a partner and head of capital markets at law firm Cooley Asia.

These companies have generally outperformed their American peers. The BNY Mellon China ADR Index, which tracks US-listed Chinese firms, surged more than 389 per cent in the past 16 years, versus 208 per cent for the S&P 500 Index.

"American investors could lose the opportunity to cash out their billions of dollars of investment before a company starts generating returns, and lose a channel to invest in growth," said Mr Cai.

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