China: Who’s Investing?

MoFo partners Thomas Chou and Rongjing Zhao were quoted in a recent article, “China: Who’s investing?”, published by Asian Venture Capital Journal (AVCJ). This article discusses the current state of China’s private equity market.

According to Thomas, deals have started to pick up, the market is stabilizing, and we are slowly seeing a return to priced equity rounds, with convertible notes raised in the last 12-18 months finally converting into equity. However, the prevailing market conditions have made the pricing process almost impossible. He pointed out that one solution is to rely on convertible notes and warrants, which allows valuations to be deferred until the target’s next priced equity round. He also witnessed that “founders and their existing investors are starting to accept that down rounds and recaps maybe the only means available to offer a valuable lifeline to bridge a company to a meaningful subsequent round of financing and ultimate liquidity event.”

In terms of China’s advantages over other markets, Rongjing pointed out that, as the largest single market in the world, China is offering a more unified landscape in terms of currency, monetary policy, legal, and administrative systems, language, and customers. She also mentions another advantage—China’s ‘talent dividend’ or ‘engineer dividend,’ which has produced a large pool of skilled labor.

In Thomas’ view, even though growth capital activity has dropped off significantly, growth deals are still getting done, albeit at more prudent valuations and at a much more selective pace than before the pandemic.

Read the full article—subscription required.