Private Equity Firms Change China Tack As Crackdown Broadens

Private equity firms are rethinking their strategies in China as a widening regulatory crackdown on some of the country's hottest sectors forces investors to scout for bets in other industries that they hope will be less vulnerable to sudden policy changes, Kane Wu and Julie Zhu reported for Reuters.

Photo Insert: A copper bull in the Bund, Shanghai, China

Private equity (PE) and venture capital (VC) funds are pivoting away from data-heavy, consumer-facing internet companies to sectors including semiconductors and renewable energy, industry executives said.

The shift comes as investors reel from a barrage of regulatory scrutiny and radical rule changes in the last few months targeting big domestic companies, mainly from the internet, private education, and property sectors.

The move to ban private tutoring firms last month from making a profit from teaching core school subjects and raising capital, for example, is set to trigger a scramble among private equity investors to find an exit after pouring in billions.

The unexpected crackdown will not only cast a long shadow over PE investors' return prospects but will also narrow investment opportunities at a time when many of them are sitting on billions of dollars worth of capital.

"We are faced with the most stern regulatory environment in over a decade when market competition is the fiercest and capital the most abundant," said Richard Ji, chief investment officer, and managing partner of All-Stars Investment.

"With increasing regulation, good companies are becoming fewer and more expensive. Overall, future returns for venture and private equity investors may decrease," said Ji, whose Hong Kong-based fund focuses on leading companies in new economy sectors.

Forty-three China-focused funds raised a total of $49 billion this year, nearing 2020's annual amount of $50 billion, according to Preqin data. Hillhouse Capital Group alone raised $18 billion in Asia's biggest non-state-backed fund in May.

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