US private equity and venture capital investments in mainland China fell dramatically in the first quarter, setting 2023 on track to become the worst year for investments in at least five years.

Aggregate deal value in the first quarter was $400 million, down more than 86% from $3.03 billion in the same period in 2022, according to S&P Global Market Intelligence data. The number of deals declined to 28 from 61 year over year.

First-quarter deal value and volume were also down compared to the fourth quarter of 2022.

Investor concerns

Geopolitical tensions and the unknown impact of mainland China's nearly three-year zero-COVID lockdown on manufacturing and domestic consumption are key reasons behind US investors' loss of interest, according to Bain & Co.'s "Asia-Pacific Private Equity Report 2023."

"Worsening geopolitical tensions between China and the US led the US to impose additional trade restrictions on selected sectors, curbing China's growth and further depressing the sales of companies relying on exports to the US and other Western markets," according to the report.

Additionally, stronger regulatory scrutiny of M&A in the US and China, as well as US technology restrictions on emerging technologies, are ongoing investor concerns.

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Small deals

China deals with US private equity involvement during the first quarter were on the small side with nine of the 10 largest transactions announced during the period valued at less than $100 million.

The healthcare sector dominated the M&A deals and funding rounds with US private equity involvement in the first quarter, accounting for seven transactions worth a total of nearly $217.1 million.

The largest US private equity-backed deal was a $100.0 million funding round for Chinese medical-device maker Chongqing EVAHEART Medical Device Co. Ltd. US-based Vivo Capital LLC, Sinovac Biotech Co. Ltd. and China Taiping Insurance Holdings Co. Ltd. participated in the round.

The second-biggest deal was a $44.3 million funding round for Chinese e-bike manufacturer ShenZhen Tenways Technovation Ltd. The round was led by L Catterton Partners, along with Meridian Capital Partners Inc.