Venture capital and private equity funds focused on China, which raised significant capital during the nation’s tech boom a few years ago, are now facing mounting challenges. With shrinking opportunities and tightening timelines, many funds are seeking to extend their investment periods to better deploy capital and capitalize on improving market conditions.
Private fundraising for Asian assets has sharply slowed as global investors pull back from China, the world’s second-largest economy. From 2020 to 2022, when China remained a hotspot for venture capital, dollar-based private equity funds raised over $260 billion, according to data from Preqin. However, as China grapples with a severe downturn in both public and private market valuations, many funds are struggling to generate returns.
Several US dollar-based funds focused on China are now in talks to extend their investment periods, offering more flexibility for managers to find lucrative exit opportunities. These funds typically operate on a seven- to 10-year cycle, with capital investments made within the first three to five years. However, due to the slumping valuations, managers are finding it increasingly difficult to meet their financial goals.
Tencent Plus Partners, a venture firm co-investing with Chinese tech giant Tencent Holdings, is negotiating a one-year extension for one of its funds, after doing so at least once previously, according to sources familiar with the situation. The fund, which counts the Canada Pension Plan Investment Board as a key backer, has struggled to deploy capital in a challenging environment. Tencent and CPPIB have both declined to comment on the matter.
Similarly, Beijing-based ZhenFund, an investor in early-stage Chinese companies, has extended its investment period for one of its dollar funds from three years to five, according to insiders. ZhenFund representatives declined to comment.
The difficulty in finding viable investment opportunities in China is partly due to the lack of clear exit paths. The Hong Kong IPO market, a popular avenue for startups to go public, has been in a lull for several years. Additionally, Chinese regulators have been slow to approve listing plans, and many companies require approval from the country’s securities watchdog to pursue IPOs overseas.
This challenging environment has led to a misalignment of interests between general partners (GPs), who manage the funds and make investment decisions, and limited partners (LPs), who provide the capital. GPs are typically paid annual management fees based on committed capital and earn carried interest based on fund performance. However, LPs, who have less control over the decision-making process, stand to lose out if GPs are forced to deploy capital when market conditions are unfavorable. As a result, LPs are negotiating lower management fees in exchange for extending investment periods.
The difficulties are further compounded by a decrease in capital raised for new funds. In 2022, only 11 China-based US-dollar venture capital funds raised $1.3 billion, accounting for 28% of Asia’s total VC funds. In contrast, 62 funds raised $17.2 billion the previous year, representing 60% of the total capital from the Asia Pacific region, according to Preqin.
China’s share of venture and private equity funds has also dwindled significantly, dropping from more than half of Asia’s total to just 19% over the past five years. The retreat of North American pensions and rising geopolitical tensions are contributing factors to the reduced inflow of funds.
The downturn in investor interest is evident in the case of Source Code Capital, an early backer of TikTok parent ByteDance. In February, the firm halved its fundraising target to $150 million due to weaker-than-expected investor demand.
“We’re seeing a trend of fund extensions because managers can’t secure an IPO exit or a trade sale for their portfolio companies,” said Pang Lee, a fund advisory expert at law firm Cooley. “The market’s liquidity has been challenging, leaving many assets in limbo.”
The drop in Chinese company valuations has made it more difficult for startups to achieve favorable prices during IPOs. While the Nasdaq Golden Dragon China Index is up nearly 20% this year, it remains about 61% below its February 2021 peak.
The situation has created further tensions between LPs, who may have conflicting priorities on whether to extend the investment period for a fund. “Some LPs don’t want liquidation, some don’t want a markdown, others want a distribution — that’s why there are diverging interests,” explained Lee. Even when funds attempt to offload their assets through secondary sales, disagreements over pricing with potential buyers have made the process more complicated.
While the outlook remains uncertain, there are signs of potential improvement. In February, Chinese President Xi Jinping expressed his support for private enterprises during a meeting with prominent tech entrepreneurs. This renewed optimism around Chinese tech, particularly the rise of AI champion DeepSeek, has helped boost investor sentiment and fueled a rally in tech stocks, which could have positive effects on private company valuations.
However, it is still too early to determine whether this shift in sentiment will encourage global investors to increase their long-term investments in China. According to Sam Padgett, managing director at Deloitte, the current market conditions are limiting the ability of smaller general partners to raise new funds. “For a lot of small and mid-cap GPs, their ability to raise a fund is hindered in the current market,” Padgett said. “Ironically, one of the reasons people don’t invest is because committees lack conviction on their exit options.”
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