Tech start-ups the new gold for China's wealthy as economy slows

[HONG KONG] More wealthy Chinese are ploughing money into technology start-ups which are increasingly seen as a safe haven as the slowing economy eases hopes of extracting returns from traditional investment such as stocks, property or gold.

While Chinese shares are being pummelled and the yuan is under pressure, these private investors are turning to businesses such as taxi-hailing company Didi Kuaidi, which saw its valuation rise 25 per cent to about US$20 billion in a US$1 billion funding round launched last week.

This gain sharply contrasts with the 43 per cent plunge in the CSI 300 index of top-listed companies in Shanghai and Shenzhen since June last year, underscoring the appetite for tech firms. China's stock markets are the worst performing in the region, according to Thomson Reuters data.

"First-tier (technology) names still retain their valuation due to a capital flight to safety," said Richard Ji, managing partner of fund All-Stars Investment and a tech industry expert.

Venture capital investments into China's technology start-ups more than doubled to US$32.2 billion in 2015, with US$4.7 billion of investments so far this year, according to research firm CB Insights.

This is poised to rise further, as China is awash with capital from local private equity investors, insurance companies, wealth management firms as well as yuan funds raised by global venture capital players, bankers said.

Even some mid-sized banks, including China Merchants Bank are investing into tech ventures.

"We have seen a lot of interest in alternative and direct investing outside China as well as in China, such as investments in private companies and startups," said Francis Liu, regional market manager for ultra-high net worth clients in Greater China at UBS Wealth Management.

What is unique about China's venture capital and private equity industry is that a good chunk of yuan fund raising comes from wealthy individual investors. This contrasts with Western markets, where institutional investors take the lion's share of such placements.

A lawyer told Reuters she had recently structured several investment deals into tech companies for wealthy clients. She declined to be named, or give details of the deals due to the confidentiality of the matter.

In addition to Didi Kuaidi, which is backed by China's e-commerce giant Alibaba and social networking firm Tencent, large unlisted companies such as lending platform Lufax and Meituan-Dianping, a crossover between Yelp and Groupon, have raised billions of dollars in recent months, at higher valuations.

And as the economy slows, investors are more hesitant to back ventures by untested names, preferring companies with established scale and the ability to expand outside China.

"Investors want to throw money behind big names. For the smaller guys, it's getting more difficult," said a banker who was involved in several recent private fundraising rounds for Chinese technology companies.

REUTERS