• VCs are being pushed overseas by adverse fundraising conditions for China strategies
• Middle East is important for LP relationships, US is important for technology access
• GPs are rebranding themselves as non-Chinese, but LPs aren’t necessarily convinced

Dozens of Chinese venture capital firms established offices in Singapore during the pandemic, positioning Southeast Asia as a new target market amid protracted lockdowns back home. Three years on, these international ambitions stretch even further: to varying degrees – and for different reasons – the Americas, the Middle East, and Europe are now on the agenda.

Linear Capital, for example, has dispatched a partner to Germany to establish a local investment team; BAI Capital has hired two venture partners in Latin America; and CMC Capital and Joy Capital have opened offices in the Middle East. Then there are the likes of eWTP Arabia Capital and MSA Capital, which have Chinese origins but now consider themselves global investors.

“It’s easier to talk to LPs when you have a bunch of American portfolio companies,” said one Chinese VC investor who has backed four US-based artificial intelligence (AI) start-ups in the past 12 months. “We still have quite a lot of capital in our most recent fund, but if the situation stays the same for another two years, it would be a real headache.”

The “situation” is China’s sub-optimal VC fundraising environment. Barely a handful of US dollar-denominated funds have closed so far this year, with 5Y Capital receiving more than three-quarters of the approximately USD 1bn committed, according to AVCJ Research. The USD 4bn raised across 14 closes in 2023 compares to averages of 27 and USD 10.9bn for the prior five years.

With LPs either cowed by geopolitical concerns, uncertain about paths to exit, or nonplussed by China’s economic outlook, some Chinese managers might face an existential crisis. Focusing on different geographies – perhaps leveraging Chinese entrepreneurs or technologies in the process – is seen as a possible solution. But will LPs buy into such a comprehensive rebranding?

“Successful GPs always stick to their key markets and those that do so across cycles earn the trust and respect of LPs,” said Kaiming Chiang, a director at UTM Management, a Malaysia-based single-family office. “Those pivoting to new markets must demonstrate that they have competitive advantages in their target markets and are not just doing it for the sake of fundraising.”

Whether managers are altering investment strategies for existing funds or raising dedicated pools of capital for new geographies, LPs will be concerned about execution. “The second scenario might be better than the first, maybe they can ride some tailwinds,” said Yurui Lu, a fund formation partner at Jingtian & Gongcheng. “But they must convince LPs of their ability to manage overseas investments.”

Follow the founders

When making the case for ex-China strategies, venture capital investors often point to the steady stream of Chinese founders setting up overseas. Agile Robotics, which was established by Zhaopeng Chen and Peter Meusel, became Linear’s first Europe-based investment in 2018. It is headquartered in Munich, has R&D centres in Germany and China, and employs over 1,900 people worldwide.

“A global-in-nature approach has become crucial. With this model, we aim to leverage China’s supply chain dividends, Europe’s solid technologies, and global capital,” said Harry Wang, Linear’s founder and CEO. Asked about fundraising pressures, he claimed that exits are the bigger concern – and he believes overseas companies are more flexible than their Chinese peers in terms of liquidity events.

As the pandemic faded, Linear visited robotics labs across Europe and found not only attractive opportunities but also a willingness to work with Chinese investors. Three more deals followed last year, including a seed round for robotics start-up Swiss-Mile that also featured Agile and HongShan.

The trail of corporate footprints from China to Southeast Asia is even clearer, as demonstrated by companies ranging from ice cream and tea brand Mixue and hotpot restaurant chain Haidilao to Shein and TikTok. Pang Lee, a partner at Cooley, observed that 90% of his clients are pursuing outbound investment opportunities, with Southeast Asia and the US the most popular markets.

However, the mid-pandemic migration to Singapore doesn’t appear to have delivered on expectations. Chinese VCs participated in more than 60 funding rounds for Southeast Asia-based start-ups in 2021, but deal count fell sharply in each of the next two years. Meanwhile, anecdotal evidence suggests that many of the firms that opened offices in Singapore have refocused on China.

Most of these GPs – Source Code Capital, Lyfe Capital, Qiming Venture Partners, and Shunwei Capital, among others – declined to comment on Southeast Asia or didn’t respond to requests for comment. The founding partner of another, Boyu Hu at XVC, said he seeks opportunities in specific verticals globally and overseas businesses have made up 20%-30% of deal flow in recent years.

Some remain active, albeit selectively. SWC Global, a venture capital firm established in 2022 by Tuck Lye Koh, a founding partner of Shunwei, has recently backed sales intelligence platform MeetRecord, blockchain-based trading business UXUY, and cryptocurrency wallet UniSat, while Qiming led a USD 22m Series A for Indonesian electric vehicle battery start-up Swap Energy.

“Because of the geopolitical situation, China-plus-one strategies are being pursued by many companies and investors. That makes Southeast Asia even more interesting given that it’s close to China and also politically neutral,” said Helen Wong, a partner at Indonesia-based AC Ventures who previously initiated Southeast Asia investments by Qiming, starting around 2017.

Indeed, groups like 01 Ventures, Source Code, Buhuo Ventures, and Yunqi Partners have plugged this into their value proposition. They hold regular seminars for portfolio companies to provide training and share cross-border transaction expertise.

Of scale, liquidity

01 Ventures started out trying to back local start-ups in Southeast Asia but eventually switched to backing Chinese founders under a China-plus-one strategy. According to Ian Goh, the firm’s founding partner, the gulf between China and Southeast Asia in terms of commercial culture was too wide.

Scale is another challenge highlighted by several industry participants. Southeast Asia comprises multiple markets that lack a common language or culture and are at different stages of economic development. Relatively few start-ups have become truly pan-regional, which means more concentrated opportunities and smaller cheque sizes – sometimes too small for most Chinese funds.

Moreover, liquidity is harder to obtain in Southeast Asia than in China. The region has seen a handful of technology listings, with some unicorns trading poorly post-IPO almost regardless of where they go public. J&T Global Express, a logistics business founded by the ex-Indonesia CEO of Chinese mobile phone brand Oppo, raised USD 400m in Hong Kong last November but is 40% below its IPO price.

Still, J&T’s rise from Indonesia start-up to Southeast Asia’s dominant express delivery player makes it stand out as an example of Chinese entrepreneurship and capital combining successfully in the region. Tencent Holdings, Boyu Capital, ATM Capital, Hillhouse Investment, and Hidden Hill Capital feature in the investor roster.

“We are not just talking about globalisation; we have already achieved results from our strategies. The success of companies like J&T have helped establish our reputation and now Chinese founders seek us out when they set up businesses in Southeast Asia,” said a spokesperson from ATM.

The firm was founded in 2017 by Tony Qu, previously of China-based CDH Investments and BAT Capital. Focused on Southeast Asia from the outset, it has raised four funds and has over USD 1bn in assets under management. J&T was one of its earliest investments.

Chris Loh, a managing partner at fund-of-funds Axiom Asia, noted that offering LPs direct exposure to a fast-rising unicorn like J&T – the company raised USD 5.4bn from investors between 2017 and 2023 – can help solidify a relationship before launching a first-time fund. His first question to GPs seeking capital for investments outside its local market is invariably, ‘Where’s the deal flow?”

Two-way street

J&T expanded into the Middle East through a joint venture with eWTP Arabia Capital, which was established in 2019 as an offshoot of Alibaba Group-backed Electronic World Trade Platform (eWTP). A debut Asia-Middle East fund closed on USD 400m in 2020 with three-quarters of commitments coming from sovereign wealth funds in the Gulf Cooperation Council (GCC) region. Fund II is currently in the market.

The firm is exceptional in that it moved early with a specific mandate focused on China-linked businesses in emerging markets. For most Chinese venture capital firms, the Middle East has emerged more recently as a geography interest – a consequence of the need to rebuild LP bases in response to weakening appetite in investor strongholds like the US.

“Many clients are interested in the Middle East right now but success rates are relatively low because of a mismatched in GP-LP demand,” said Lu of Jingtian & Gongcheng, noting that those only starting to build relationships in the region are disadvantaged due to increased competition from global GPs.

A common theme is that these relationships must be two-way. Sovereign wealth funds want not only financial returns but also access to co-investment and even co-GP arrangements. There might be an agreement stipulating that a certain percentage of a fund will be deployed in the Middle East; and if not, there could be requirements that portfolio companies set up production and R&D facilities in the region.

Family offices tend to have more bespoke agendas – sharing technologies and commercial opportunities – influenced by their business interests. As a rule, Chinese VCs have found that introducing proven business models to the Middle East is more feasible than backing local start-ups.

“It’s more about the lifecycle of the business. Companies in various industries could find opportunities in the Middle East, but it’s more suitable for the expansion of growth-stage businesses than start-ups at the zero-to-one stage,” said Wayne Shiong, a partner of China Growth Capital.

Shiong, like many of his peers, first visited the Middle East for fundraising purposes. He then switched to a portfolio-first strategy, reasoning that localisation is the key to establishing credibility.

EWTP Arabia Capital took a similarly strategic view, targeting Chinese and Asia-linked companies looking to expand in the Middle East and local businesses that benefit from Asian networks and value-add. It tends to work with larger, more proven companies and has previously established joint ventures in the Middle East with the likes of Alibaba and J&T.

“Fundamentally, by managing local capital we represent local stakeholders’ interests. We’re not a Chinese investor in terms of capital base, and the companies we back are localised in terms of ownership, strategy, and operations. This is very important from both a local stakeholder and international LP perspective,” said Niklas Ponnert, a managing director of eWTP Arabia Capital.

Ponnert remains positive about China’s long-term fundamentals and ability to deliver returns, but he believes investors must find the right way to maintain exposure to the country. With one eye on the need to mitigate risks presented by the current geopolitical environment, this might involve “different models than the one that worked over the last 20 years.”

Changing the story

The notion of leveraging China without being seen as Chinese is already being explored by corporates – to the point that many are seeking to rebrand as international players. Moving corporate registrations and headquarters to less sensitive locations like Singapore is a common tactic, especially when a US IPO is potentially on the horizon.

VC investors are of a similar mind. Some GPs have quietly dropped China from their names, while others have positioned themselves as sector specialists with global mandates. The US is fertile territory for such approaches given its strong ties to China – many VCs and founders have and continue to spend time there – and its appeal as an investment destination.

Healthcare is a case in point. Drug development is increasingly a global endeavour, and the China-US channel is well established, with scientists and intellectual property moving in both directions.

Co-win Ventures has ramped up its investment in global therapeutics in recent years, driven by what Xin Huang, a managing partner at the firm, described as the premiums attached to innovation in the US and Europe. Competition and homogenisation of the Chinese market, plus the predominance of budget-constrained public hospitals, are contributing factors.

There are concerns that scrutiny of Chinese participation in sensitive technologies may spread to healthcare. Earlier this year, US lawmakers proposed legislation preventing data sharing with Chinese biotech companies and then doubled down by calling for sanctions against WuXi AppTec.

According to Huang, it is “an addressable issue” because data and supply chain security are being scrutinised, not intellectual property, which is more easily split between China and overseas markets. However, he is worried about restrictions on Chinese investment in US companies. Co-win already avoids taking the lead on deals and partners with corporate VCs or well-known independent players.

AI is far trickier, but Chinese investors are still finding ways to participate in US deals. Linear has carved out a USD 20m-USD 50m tranche from its latest fund for global AI, and half of the four most recent investees are US-based. ZhenFund, Monolith Management, and Primavera Capital Group’s VC unit are also actively pursuing AI deals, multiple industry sources claimed.

This doesn’t mean getting access is straightforward. Even when they avoid highly sensitive areas, Chinese VC firms have been rejected despite offering the highest valuations and they find it difficult to get board seats if admitted. LPs are also increasingly distancing themselves from technological information about AI start-ups backed by portfolio GPs, a Hong Kong-based lawyer observed.

Chinese VC participation in funding rounds for North American start-ups was reasonably consistent from 2014 to 2022, hovering around the annual average of 42 apart from the boom year of 2021. Deal count slumped to about 20 in 2023 and hasn’t recovered, according to AVCJ Research.

Clean skins

However, investments may be falling below the radar because VC firms are taking on new identities. Recognising that geopolitical risk is unavoidable, but the AI opportunity is unmissable, David Wei, chairman and founding partner of Vision Knight Capital, established EnvisionX Capital last year in Palo Alto to address the market.

In what amounts to a clean skin strategy, Wei chose to serve as an advisor to the firm rather than as a partner. “I’m not an American,” he said. “[Me stepping back] is not required by the regulators, but I want us to be stricter with ourselves than the US regulations.”

A debut fund won support from some global LPs that also back Vision Knight. Wei declined to disclose the fund size, but he noted that EnvisionX will seek capital from US institutional investors once it has established more of a track record.

The firm’s differentiators are said to be the local networks of the founding partners – who include Holly Zheng, CEO of AI marketing specialist BlueFocus International, and Alex Liang of Oriza Ventures – as well as its industrial resources and global exposure. While endorsing the strategy as innovative, one US-based LP questioned whether EnvisionX has sufficient competitive edge to take on local VC investors.

Half the start-ups backed by the firm to date were established by Chinese founders, and most do not originate from Silicon Valley. Speaking to Chinese media, Zheng gave two reasons for this: high valuations of US-based AI start-ups; and a desire to help Chinese entrepreneurs, who might otherwise struggle to secure funding in the US, enter the Silicon Valley ecosystem.

Wei emphasized the latter point. “We are a Silicon Valley-rooted fund,” he said. “We want to build this soft connection to help non-local founders – not only Chinese but also founders from other countries – expand business in the US.”