PE shuns China fintech startups amid P2P worries

China's financial technology sector has seen a sharp drop in flows from private equity investors amid concerns about peer-to-peer lenders and the prospects for start-ups.
PE shuns China fintech startups amid P2P worries

Private investment into financial technology slowed sharply in China last month, amid a crackdown on peer-to-peer (P2P) lending platforms and investors taking a more cautious stance on start-ups in the sector.

Private equity and venture capital investment in the mainland internet sector totalled $1.5 billion in February, down from $4.2 billion in January, while flows into the financial sector collapsed to $49.7 million from $2.3 billion, according to Beijing-based ChinaVenture Investment Consulting. Both sectors are relevant, because the firm categorises most fintech companies, such as P2P firms, under financials.

These declines contributed to a substantial drop in China PE flows across all sectors (though the lunar new year holiday in February was also seen as a factor). Total investment fell 70% to $4.14 billion in February from $14.03 billion in January and $14.95 billion in December. 

Caution is growing as a result of negative news emerging about P2P platforms, noted Zhou Linlin, chief executive and co-founder of Shanghai-based PE firm Principle Capital. For instance, Chinese regulators shut down P2P lender Ezubao – unveiled as a ‘ponzi’ scheme – in late January, while mainland authorities have drafted new rules on P2P lending as reported in late December.

Moreover, Kenny Lam of Chinese wealth manager Noah Holdings, told AsianInvestor in mid-December he felt some P2P platforms could potentially harm the wealth management industry.

Zhou said mainland investors were now increasingly focused on companies related to internet or financial giants, such as Ant Financial, Zhong An Online Property Insurance and Shanghai Lujiazui International Financial Asset Exchange (Lufax).

Ant Financial, formerly known as Alipay, was Alibaba’s affiliate and operates the group’s payment platform. It is valued at $45 billion and received Rmb21 billion ($3.2 billion) in PE investment last year, according to ChinaVenture.

Zhong An is an online property insurer backed by Alibaba, Tencent and China’s Ping An Insurance. Launched in 2013, it is valued at $8.2 billion and received Rmb5.8 billion of PE investment in 2015.

Lufax was founded in 2011 as an online internet finance marketplace and is an affiliate of Ping An Group. It is valued at $18 billion and received $1.2 billion in PE investments in January this year alone.

Li Hui, an analyst for ChinaVenture, echoed Zhou’s thinking: “Investors are more confident in these giants,” she noted, while they are harbouring concerns about small start-ups, such as around their future valuations, resources and potential for development.

Nevertheless, the internet sector is still the best bet for VC and PE investors, said Li. In 2015, companies that used internet technology to improve their services attracted about 30% to 40% of total Chinese PE investment in the internet sector and e-commerce firms took in 30% to 40%, according to ChinaVenture.

Zhou agreed: “The internet can help improve the efficiency and reduce cost for every industry.”

But the market is tough, he noted: “In my chat with peers, everybody says it’s been a difficult time. The global financial markets and China’s real economy are both not good.”

Still, Zhou sees opportunities in services and advanced manufacturing industries, with robotics one area he has highlighted as a good bet.

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