- The coronavirus outbreak is shaking up China’s investing industry, as companies shift their business mentalities, while others seek new opportunities.
- “After this crisis, the market will definitely slow down. That will definitely slow down the private equity market in China,” Michael Xu, managing partner at China-based CEC Asset Management, said in an interview.Â
- While U.S. stocks plunged more than 10% last week in their worst week since the financial crisis, some New York-listed Chinese companies were notably less affected.
BEIJINGÂ â The coronavirus outbreak is shaking up China’s investing industry, as companies shift their business mentalities, while others seek new opportunities.
Rapid economic growth in China once meant that businesses could ride short trendsÂ and quickly generate capital for their founders’ next venture, with little thought to the long-term consequences, or opportunities.
Now, some in the industry say more start-ups are realizing the importance of having more capital on hand, while investors are assessing what trends the virus’ disruptions may accelerate.Â The coronavirus that’s killed more than 2,900 people in China has brought much of the country to a near standstill, following last year’s slowdown in official GDP growth to 6.1%.
The venture capital industry in China was already struggling last year.
AfterÂ surging over the last decade to a high $110.7 billion in deal value in 2018, Chinese venture capital deals dropped to $49.4 billion in value last year, according to financial data firm PitchBook.Â The value of VC deals notched just $2.1 billion for this year through Feb. 26, the company added.
“The virus is a kind of transmission of negativity,” said Jeff Wu, a China-focused partner at Silicon Valley-based Pegasus Tech Ventures, according to a CNBC translation of his Mandarin-language remarks. “2020 will be even harder.”
“For the first half of the year, VC, PE (private equityÂ firms) need to maintain their network, maintain their cash flow,” Wu said.
Investors speak generally of canceled meetings and delays in deals as a result of the virus. It’s just a slice of the ripple effects the highly contagious disease is having on the Chinese economy. Global companies that rely on factories in the mainland are worrying about the ability of suppliers to get back to work and fulfill orders.
Hubei province and its capital of Wuhan, the center of the outbreak, are still reporting deaths and hundreds of new cases, even if the virus’ spread seems to have stalled in the rest of the country. The disease has now spread beyond China’s borders and infected thousands in at least 60 countries around the world.
“After this crisis, the market will definitely slow down. That will definitely slow down the private equity market in China,” Michael Xu, managing partner at China-based CEC Asset Management, said in an interview. The private equity market in China is very small, and “U.S. private equity (firms) cannot come to China to do their due diligence, cannot close the deal.”
Preqin said China-based venture capital and private equity firms have raised about $600 million so far this year, versus $84 billion for all of last year.
The industry’s struggles have created opportunities for Xu, who says the firm is flush with cash despite having to delay the launch of its second U.S.-dollar fund from February to June.Â “We see a huge, huge opportunity after this crisis to buy a lot of our (investment portfolio) competitors (at) a very cheap price,” he said.Â Â
The firm’s investments include biotech, medical device and e-commerce businesses, which have not really been affected much, even ifÂ they’re not necessarily doing as well as before the virus hit, Xu said. HeÂ noted that one investment in a convenience store chain in Wuhan is still making moneyÂ â roughly 2 million yuan ($286,000) a dayÂ â despite the city’s quarantine state.