China experienced a significant pullback of U.S. private equity and venture capital investments in 2022 amid geopolitical tensions and strict lockdown measures in the world's second largest economy.
The aggregate value of U.S. investments in China declined roughly 76% year over year to $7.02 billion from $28.92 billion, and the number of deals dropped about 40% to 208 from 346, according to S&P Global Market Intelligence data.
M&A and fresh funding rounds involving U.S. private equity firms dropped to their lowest quarterly tally in the last two years to $530 million across 36 deals in the final quarter of 2022. A total of $7.17 billion across 94 deals was logged in the fourth quarter of 2021.
China's zero-COVID policy and ongoing rocky trade relations with the U.S. were the main factors behind the exodus of U.S. private equity capital.
The tough policy, along with supply chain issues in the country, made it difficult for foreign investors to come and seize opportunities. Likewise, the trade tension between the U.S. and China has been lingering for several years, causing some investors to proceed with caution, according to Edwin Northover, partner and head of financial institutions in Asia at law firm Debevoise & Plimpton.
The shooting down by the U.S. of a suspected Chinese surveillance balloon off the coast of South Carolina on Feb. 4 adds to the friction between the two countries.
Investors turn to India, Southeast Asia
India and Southeast Asian countries have benefitted from the pullback of U.S. private equity investment in China.
Investment in India is expected to accelerate as the government increasingly eases rules that had made it difficult for foreign investors to get involved. Countries such as Vietnam and Indonesia are also seeing an increase in investment activity.
However, as China shifts away from its zero-COVID policy, Debevoise's Northover predicts the country's economy "will come roaring back in the second half of this year." The resurgence is expected to be powered mostly by domestic activity as foreign investors wait and see developments in U.S.-China trade relations and perhaps look more carefully at the sectors they target in China.
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Tech continues to be the sector of choice
Despite continued U.S. and Chinese regulatory monitoring of technology deals, the technology, media and telecommunications sector dominated the M&A transactions and funding rounds with U.S. private equity involvement in 2022. The sector accounted for 97 deals worth a total of roughly $3.59 billion last year.
The largest transaction in the sector in 2022 was the $671.7 million growth funding round of Chinese chip manufacturer Guangzhou Cansemi Technology Inc., which included participation from U.S.-based private equity firms Walden International and SAIC Venture Capital.
The $800 million series B round of real estate developer JD Property, in which Warburg Pincus LLC took part, was the largest U.S. private equity-backed deal among all sectors in 2022.
