Global private equity and venture capital investment in mainland China was $68.80 billion in 2023, the lowest in five years, while the number of deals decreased for the second consecutive year, according to S&P Global Market Intelligence data.
Contributing to the global decline is the pullback of US private capital, which was $7.25 billion in 2023, the lowest total value since 2019.
The numbers reflect the dramatic drop in investor sentiment toward mainland China, represented in a December 2023 survey report by Probitas Partners LP.
In 2024, only 3% of institutional investors surveyed considered China to be one of the most attractive Asian markets compared to 58% in 2021.
"The fall in interest has been dramatic over the past three years, with no sign of reversing," the report said, citing US and China political tensions, concerns about China's economy and regulatory actions by both countries.
Tech-driven restrictions
US government concerns over outbound technology investment, followed by last year's investment restrictions on AI, semiconductor and quantum computing companies in "countries of concern," appear to be impacting tech sector deals.
In 2021, global private equity or venture capital investments in mainland China's IT sector numbered 1,326. Last year, the number fell to 842, according to Market Intelligence data.
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Government scrutiny heightened this year. In February, a US House Select Committee investigation named GGV Capital LLC, GSR Ventures Advisors LLC, Qualcomm Ventures LLC, Sequoia Capital Operations LLC and Walden International as five US venture capitals that have cumulatively invested at least $3 billion across China's AI and semiconductor companies that allegedly support military and human rights abuses. Last year, Sequoia and GGV announced they will split off their China operations into separate entities.
The House investigation will likely increase limited partners sensitivity to China-targeted investments.
"I think it will create a chilling effect, at least for the US funds," said Peter Lu, partner and global head of McDermott Will & Emery’s China practice, who advises clients on cross-border M&A.
Middle East investors
Alternative sources of capital are coming from the Middle East, according to Lu. He cited Saudi Arabia's Public Investment Fund deal this month to invest, through its gaming unit Savvy Games Group, in VSPO, a Chinese esports company. Also, Mubadala Investment Co. PJSC opened an office in Beijing, suggesting more investment activity.
China's local funds are also stepping up. Lu wrote a report that estimated Chinese city funds accounted for 63% of total Chinese private equity deal volume between 2016 and 2022.
“You'll see Chinese companies, especially state-owned companies playing a very big role, the so-called city funds. They are increasingly filling the gap," Lu wrote.
Mainland China-based private equity firms were the investors in the majority of the top 10 deals by value in 2023.
The flow of know-how
Capital alone is not enough. Private equity and venture capital investors can plug a startup into a global ecosystem of technology and business expertise as well as provide synergy with portfolio companies — key ingredients for developing into a leading edge player.
"Ultimately, China doesn't need our money," said a senior US administration official in August 2023 when tech restrictions were announced.
"They're a net capital exporter. So, the thing we're trying to prevent is not money going into China overall, because they have plenty of money," said the senior US administration official. "The thing they don't have is the know-how."