Amid high interest rates, a lack of exit pathways, and rising geopolitical tensions, fund raising has taken a hit globally but more particularly in the Greater China region.

Private equity ( PE ) and venture capital ( VC ) fund raising in Greater China ( including mainland China, Hong Kong, Macau and Taiwan ) has continued to shrink for the third year in a row, both in terms of the number of funds and the aggregate capital raised.

Nevertheless, the region is expected see a recovery in investor sentiment in view of the stabilizing economy and government stimulus measures.

The aggregate capital raised dropped from around US$180 billion in 2021 to about US$10 billion in the first seven months of 2024, with the number of funds declining from nearly 1,200 to less than 100 during the period, according to Preqin’s latest report.

By fund type, growth funds and fund of funds ( FOF ) represent 55% and 45%, respectively, of the total amount raised by Greater China-focused PE funds as of July 2024. Balanced and buyout funds recorded no amount raised during the seven-month period.

The region, particularly mainland China and Hong Kong, is experiencing economic uncertainty and slower growth, making buyouts less attractive. Buyout funds typically involve acquiring mature companies and using debt to finance the purchase. In a volatile financial environment, high levels of debt can increase risk, particularly in a high-interest-rate environment, as the Federal Reserve only started cutting its interest rates this September.

“Due to the complex and volatile global financial market, geopolitical uncertainties, and other factors, global investors have upgraded their risk aversion over the past two years and are cautious when looking at Chinese assets,” says Qing Xu, managing partner at China-focused Oriza FOFs.

As regards VC funds, early-stage funds took the lion’s share with over 61% of the total amount raised while venture ( general ) funds accounted for the remaining 39% in the first seven months of 2024.

The number of months Greater China-focused funds have spent in the market has hit a new record high by March 2024, averaging 25.9 months to attain 85.8% of their target. This compares with the 2023 average of 20.4 months for funds to attain 92% of the target.

Benchmarking their performance to that of the public markets, the Greater China-focused PE and VC USD funds’ Preqin Quarterly Index returned 294% from the end of 2010 to March 2024 while the MSCI Emerging Markets TR Index posted returns of 131% over the same period. 

Investors are expecting a recovery of the Chinese PE and VC market. “We have seen a resurgence of global investor interest and confidence in Chinese assets this year, with the further stabilization of China’s economic recovery and positive policies in various aspects of its financial market and regulation. In particular, China’s capital market has experienced an industry reshuffle, making the valuation of Chinese assets relatively attractive. China is a unique and huge market with world-class infrastructure and a complete industrial system − that’s why wise investors will not ignore the Chinese market in their global asset allocation,” Xu stresses.

“China's capital market is returning to the essence of value investment. In terms of industries, strategic emerging industries such as technological innovation, new energy, advanced manufacturing, and AI offer greater opportunities for future growth. In terms of stages, China’s private equity market has gradually developed to the two ends of the early stage and M&A. We believe the M&A market will become more active,” she adds.