Chinese private equity rides innovation wave

BEIJING - Private equity (PE) investment in China picked up momentum in tandem with the ongoing economic restructuring, in which emerging sectors provide better investment returns and have become new pillars of the world's second-largest economy.

The combined size of committed capital at all 52,403 PE and venture capital (VC) funds registered with the regulator topped 12.28 trillion yuan ($1.8 trillion) as of April, rising by 380 billion yuan in that month alone, said the Asset Management Association of China (AMAC).

As of April, the sector had 225,600 employees, according to AMAC.

Unlike investment in publicly traded companies, private equity investment is made by PE, VC or angel investors, providing capital to target companies or nurture expansion of start-ups.

More breakdown figures showed that Chinese investors' enthusiasm was skewed toward emerging sectors and start-ups with sunny prospects rather than stock markets.

Of the total, nearly 5.6 trillion yuan was managed by funds devoted to equity investment as of April, surging 19.3 percent from the end of last year, while that owned by funds specializing in investing in stock markets declined 13.3 percent over the period to around 2.4 trillion yuan.

The benchmark Shanghai Composite Index closed at 3,154.66 points on April 28, the final trading day of last month, barely moving from the 3,103.64 points at closing on December 30, 2016, as market sentiment was weighed on by factors including a slew of regulatory measures to contain financial risk.

Emerging sectors such as smart manufacturing, the sharing economy and industrial robots gained traction against the backdrop of economic restructuring as well as mass innovation and entrepreneurship.

Despite global easing of fundraising and investment as a whole, China saw a 49-percent jump in PE and VC investment last year, according to a recent report from PwC.

China is moving toward an economy focused on consumer spending, innovation and services, reducing reliance on investment and exports of low value-added goods, and boosted by strengthened innovation and research.

To illustrate, the annual sales revenue of smart manufacturing equipment will reach around 3 trillion yuan in 2020, according to a recent industry report.

High-tech and low-carbon products witnessed faster production growth in the first four months, with the production volumes of industrial robots and solar batteries surging 51.7 percent and 18.2 percent, respectively, said National Bureau of Statistics spokesperson Xing Zhihong.

"The Chinese economy was confronted with new bottlenecks, and it had to transition from a growth mode focused on scale to one focused on efficiency, and from one reliant on resource inputs to one reliant on innovation," said Luo Mingxiong, director of the institute of Internet finance under Shanghai Jiaotong University.

Financial markets will play an instrumental role in resource allocation and risk assessment, and more entrepreneurs will embrace PE and VC investment, Luo said.

The view was echoed by Li Zhu, founding partner of Innoangel Fund, who said that a growing portion of the financing provided through traditional means such as bank loans in China will be replaced by private equity, which will register booming growth.

Li emphasized investment opportunities in artificial intelligence, creative industries and among others.

Latest figures from China Venture, an industry information provider, showed that most big PE deals in April happened in the medical and IT sectors.

Tech fields such as artificial intelligence, big data, cognitive learning and robotics are expected to continue to receive strong attention, accounting firm KPMG said in a recent report.

Although investors in Asia were cautious, China remained the top destination for VC investment in Asia, with Chinese bike-sharing platform Ofo raising 450 million dollars, the largest bike-sharing investment on record, said KPMG.