The recent US ban on certain investments in Chinese tech companies presents potential private equity opportunities for investors to fill vacated US funding, industry players said.
The development adds to a picture in which private equity investors already prefer Chinese companies with a domestic market focus.
The Biden administration announced earlier this month restrictions on US investments in China's quantum computing, advanced chipmaking and artificial intelligence (AI) companies, aiming to cut off the Chinese military's access to American capital and technology.
The curbs are set to take effect next year and bar new funding while existing investments appear exempted for now. More guidance on thresholds for restricted investments are expected later this year.
Private equity investors see potential to fill the vacuum.
“In the long run, a few of the more strategic industry sectors will have regional or local elements and characteristics,” Rainer Ender, global head of private equity at Schroders Capital, told AsianInvestor. “We are not in a global technology world anymore. Some sectors will have to develop locally.”
China is Schroders Capital’s top investment destination in Asia. As US-dollar fundraising activities cool in China, the firm sees opportunities in renminbi private equity.
Ender anticipates increased deals offloading Chinese assets from Western firms distancing themselves due to geopolitics.
“US investors and ultimately probably also European investors will think through what the future will bring from here. They will be conservative with allocations to these sectors,” Ender said.
“There are people who try to reduce their China exposure…they are testing the market but not at any price. We will monitor that. And there's also the opportunity to pick up some secondaries on that end specifically.”
Since 2018, a total of $1.69 billion and $24.9 billion in foreign private equity and venture capital investments, respectively, went into Chinese AI and semiconductor companies, with funds from the Americas region contributing 5.5% to AI and 2.5% to semiconductor. In quantum computing, there have been no investments from the Americas since 2021, while total investments in the sector stood at $171.2 million, according to Refinitiv data as of August 18.
Ender believes it is too early to tell the impact of the ban. If the restriction sets high fences around very specific activities, the effect should not be very massive, he said.
“We're paying high attention to these developments,” he said.
The global investment environment going forward will be different from the last 30 years as geopolitical tensions rise and countries become more focused on their own national interests, Ender noted.
Hence, he said the firm focuses on small- and mid-sized buyouts and early-stage or growth companies, especially in the healthcare and technology space. He also looks for companies with a domestic focus, preferring those over large companies that are capital intensive or have certain exposures to overseas markets and geopolitical tensions, such as China’s semiconductor and quantum computing sectors.
But Ender said AI will be the one sector to watch closely since a lot of firms can have exposure to relevant technologies even if they are not a tech company. So, investment decisions will depend on the specifics of the policy, he said.
On top of the geopolitical tensions between China and the US, Ender thinks the drawdown of US investments in China’s private equity market is also driven by a “denominator effect” in US investors’ portfolios. This refers to a situation where private equity allocations rise above targets due to slumping public markets. It has also led to a stronger home bias and thus fewer investments in Europe as well as China, Ender noted.
This has led to a relatively moderate capital supply in China, to a level where the investment opportunities are “very attractively priced”, he said.
“There's a very disciplined investment environment right now and it's not procyclical, it's maybe even a bit anti-cyclical to invest now from a foreigner’s perspective. But that's exactly what we find as a special appeal,” Ender said.
Andrew Sharrock, chief investment officer of Landmark Family Office, a multi-family office, thinks the US ban provides space for non-US capital to come in, such as from the Middle East.
“Maybe there's going to be more, better-valued opportunities in that space, because some funds and investors can't invest into China tech,” he told AsianInvestor.
Landmark Family Office set up its headquarters in Hong Kong this month, partly to capitalise on investment opportunities across Greater China. Within mainland China, the family office likes private equity investments across the tech sector in the medium- to long-term.
“China still needs quantum computing and chips. If you get a domestic developer who's going to start doing that, then that's probably still a pretty good play from a domestic point. The same with AI."
“It’s still opportunity,” he said, noting that China is home to a lot of mathematicians, engineers, and physicists. “They have a lot of smart people. So I'm sure they can work it out.”
But the firm is cautious about China exposure at the moment, and won’t deploy any new capital besides adding to their existing exposures. It’s still an investible market and investors just need to be extra cautious and selective, Sharrock noted.
One factor he is watching is the coming US presidential election in November 2024, which could add to uncertainties in US-China relations.
“I think the geopolitical environment at the moment is the Black Swan. No one really knows the outcome there,” Sharrock said.