Hong Kong: Venture capital investment in China’s technology sector is becoming a pastime for the national team.
State-backed funds and enterprises are championing some of the biggest private investment rounds, tapping into China’s buoyant internet sector for better returns. That includes backing the record $4.5 billion raised by Alibaba Group Holding Ltd’s finance affiliate on Tuesday.
China’s governments are armed with about 2.2 trillion yuan ($339 billion), the biggest pot of money for start-ups in the world, and are trying to cultivate a bonanza in the technology industry. The nation’s economy is in transition and planners are trying to reduce a reliance on heavy industry and encourage shifts toward consumption and innovation.
“You want the government to have some skin in the game, so they will promote more progress and disruption,” said Hans Tung, managing partner at GGV Capital, a firm in Menlo Park, California. “We are in the era where a lot of internet companies are making an impact in the offline economy.”
Zhejiang Ant Small & Micro Financial Services Group Co. said Tuesday that sovereign-wealth fund China Investment Corp and an investment vehicle of China Construction Bank, the nation’s second-largest bank, participated in the financing. The affiliate, known as Ant Financial, is valued at about $60 billion, people familiar with the matter have said.
Opening Incubators
The ability of Ant Financial to attract some of China’s largest state-backed investors echoes calls made by Premier Li Keqiang, who asked government bodies to bolster an economy that grew at the slowest pace in 25 years. The country began a campaign to support entrepreneurship in 2014, and it since opened 1,600 incubators for start-ups.
CIC also bought stakes in Didi Kuaidi, a Chinese rival to Uber Technologies Inc, people familiar with the matter said in September. Didi’s investors include Ping An Insurance (Group) Co., Beijing Automotive Group Co. and China Merchants Bank Co.
The ride-hailing app is conducting another round and could raise as much as $1.9 billion at a valuation of about $25 billion, people familiar with the matter said in April.
“These investments gives Chinese state investors a chance to align themselves with some of the fastest-growing companies in the country,” said Chi Tsang, an analyst at HSBC Holdings Plc. “For the companies, they are getting stickier long-term shareholders, which will help reduce volatility in their investor base.”
Alibaba, Tencent
Joining the funding boom, online property service Beijing Homelink Real Estate Brokerage Co. is raising at least $6 billion, people have said.
State-backed VCs managed about 2.2 trillion yuan ($339 billion) raised from local governments and companies, according to consultancy Zero2IPO.
For years, China’s internet companies were largely left alone, prompting start-ups to target overseas venture-capital money. Alibaba gained investments from SoftBank Group Corp and Yahoo! Inc while Tencent Holdings Ltd won the backing of Naspers Ltd, a South African media company that moved into digital investments. Early investors in Baidu Inc include Google and IDG Capital Partners, according to Crunchbase.
The traditional model had Chinese start-ups targeting a final listing in the US, a model pioneered by Web companies Sina Corp and Sohu.com Inc in 2000.
Internet Regulations
That practice is changing as a wave of US-listed internet companies, including Qihoo 360 Technology Co. and Jumei International Holding Ltd, have announced plans to go private. Those companies eventually want to capture higher valuations on China’s stock exchanges as the government expresses its desire for home-grown companies to stay at home.
Ant Financial is planning the country’s biggest IPO since 2010 on Shanghai’s main board as soon as this year, people familiar with the matter said in April.
Government funding interest also comes at a time when President Xi Jinping elevated regulations of internet companies to a top-level concern, regarding the rules as crucial elements in tightening social and political control. In May, he designated China’s top internet entrepreneurs as key focuses for the ruling party’s outreach, raising them to a level of strategic importance on par with ethnic minority leaders and Taiwan’s political parties.
Huge influxes of cash into the technology sector could backfire during an economic downturn, especially if investors chase companies without sustainable revenue models, Tung said.
“The valuations on these companies are arguable so high that it’s hard for VCs to justify doing that kind of investment,” he said.
