Source: China Fund News 23 October 2022 00:04:00

Vertex Venture, an early-stage investment institution controlled by "Temasek" recently revealed that the fundraising of the new US dollar fund exceeded expectations. In addition to the long-term cooperative LPs, this fund also introduces new LPs. About 90% of the funds of the new fund will be invested in new Chinese technology companies.

In response to some investment institutions going to Southeast Asia for gold nuggets, Xia Zhijin, managing partner of Vertex Venture, said in an interview with the media on October 21 that the Internet industry in Southeast Asia was about the level of China's five or six years ago, but whether the development of Southeast Asia can replicate the Chinese route is still uncertainty. In addition, China is becoming increasingly friendly to early investors, and there is no need to give up the domestic market to go to Southeast Asia.

According to the data, Vertex Ventures, established in 1988, is one of Asia's earliest venture capital companies. According to a person familiar with the matter, the scale of the first stage of Vertex Venture’s new fund has exceeded 400 million US dollars. The reporter learned from the VC circle that this is a good result for VCs focusing on early-stage projects, and a similar fund previously raised by Vertex Venture raised US$275 million.

Source: Vertex Venture official website. The official website shows that the investment cases of Vertex Venture include Microchip Bio, SES, Horizon, Mobike, and so on.

The following are the core points of the interview with Vertex Venture partner Xia Zhijin:

• European investment institutions have always had a strong interest in the Chinese market.
• Institutional investors in Southeast Asia understand China and have been deploying in China.
• China is becoming increasingly friendly to early investors, and it is not considered going to Southeast Asia for the time being.
• Some new technology opportunities are only available in China, such as some opportunities in the medical field.
• Vertex Venture pays attention to opportunities in semiconductors, new materials, new computing, and other fields.
• Diversified exit methods are essential for venture capital institutions.
• The Science and Technology Innovation Board will become one of the main exit channels for domestic technology companies.

Question: The USD Fund has introduced several new LPs in this issue. Can you give a detailed introduction on how to cooperate with these LPs?

Xia Zhijin: Indeed, everyone thought that it was easier to raise funds in USD than in RMB, but, at present, it takes work to raise funds, including some leading USD funds.

We just started raising the fifth stage US dollar fund. Many LPs in Europe were very interested in China at the end of last year and the beginning of this year. They don't have much geopolitical influence. Later, when the conflict between Russia and Ukraine broke out, the whole situation in Europe changed, and many funds had to make significant adjustments themselves. However, some European LPs can still independently think about the logic of wealth investment and are less affected by geopolitics.

In addition, LPs in countries or regions close to China are more active in investing in China because they understand China better.

For example, these funds in these countries or regions in Southeast Asia have been optimistic about China for a long time. On the one hand, they have confidence in China's stable environment. In addition, Southeast Asia has close economic ties with China daily. LPs in this region are willing to make long-term layouts in China.

Although the general environment is not good, some LPs are confident in China's long-term development. In addition, we focus on technology. In the next ten years, opportunities in China's technology, especially in hard technology, are more likely to be recognized than in other fields. Third, existing LPs continue to increase their stakes, attracting more LPs to invest in China.

Question: Do you have Middle Eastern institutions in your LPs? Has their attitude towards the Chinese market changed?

Xia Zhijin: We have no LPs in the Middle East, but LPs in the Middle East have always been interested in China, and we have also been in touch. It’s just that the fundraising pace of this fund is limited, and no LPs from the Middle East have been introduced for the time being. Early-stage investors are increasingly focusing on institutions in the Middle East. First, because many of them are financially strong, and second, they also value opportunities in China. However, there are not many institutions in the Middle East. Hence, the competition is relatively fierce, and it is necessary to work hard for a long time and establish relationships with them. According to our existing record of LP cooperation, we are confident of winning such customers in the future.

Question: What do overseas investors (LPs) focus on most about investing in China?

Xia Zhijin: The exit channel is one of the most concerning issues for overseas investors. In the past, many US dollar funds were invested in Internet projects in China. They have put out outstanding projects in the Internet and mobile Internet era. These projects are listed in the United States, and LPs have withdrawn and gained good returns. On the one hand, these projects have related benchmarking projects in the United States. On the other hand, the exit channel of the project in foreign markets is very smooth, and the valuation is also very high.

Now the arrangement for companies to exit has changed. These technology projects will likely be listed on the Science and Technology Innovation Board. Because the operation time of STAR Market is still relatively short, LPs want to know whether these technology companies invested in China, if they are listed on the STAR Market and withdraw from the market, will eventually bring considerable returns to LPs. We have no experience yet and are watching. To be clear, early investor exits can come in various ways. Vertex Venture has four main exit methods: IPO, mergers and acquisitions, equity transfer to new investors, and exit through S funds. The four methods account for the same.

Question: Recently, the PE/VC industry has had a trend in the early stage, and many well-known PEs have joined the earlier camp. How do you see this trend?

Xia Zhijin: In the past few years, late-stage funds, including large PEs, have also joined early-stage investments. This year the trend has reversed. The reason is: early-stage investment is not that easy, and investing in early-stage projects with the idea of investing in later-stage projects will hit a snag.

The addition of these PEs does impact us in the short term. For example, some institutions have invested in many projects in the form of a sprinkle of pepper powder. For us, on the one hand, the competition for good projects is more intense, and on the other hand, the valuation of early projects is also very high. But as far as we're concerned, we haven't changed much. The basis for our judgment includes the potential of scientific and technological projects, whether the direction of technology is feasible, market demand, product standardization, scalability, and whether it can establish long-term technical thresholds, etc. We want to avoid following suit. We want to make the layout in advance and feel the change in technology direction earlier. 

Furthermore, we continue to track and research many sub-sectors to find the right time to invest and avoid these new investors with a large amount of capital. For example, we have encountered several technology companies that got the funds of the so-called late-stage giants earlier, which pushed the valuation of the project to an exceptionally high level. It just happened that the whole financing situation this year was not good, and the project encountered very great difficulties when doing the next round of financing. Some investors familiar with the technology industry deliberately avoid the early-stage projects invested by these so-called bigwigs.

Question: Which hard tech tracks are you mainly focusing on right now?

Xia Zhijin: There are two aspects; Vertex Venture has been in the direction of the layout and will increase the focus of the layout next.

In terms of the layout direction, the first includes semiconductors.

Because there are many subdivisions of semiconductors and there are many incremental markets. For example, in the automotive field, brilliant cars and semiconductors in the automotive area have total needs. Why emphasize new markets? It is because only in these new fields can early entrepreneurial teams have the opportunity to build their barriers. For example, many new demands exist in the Internet of Things. In the field of semiconductors, in addition to downstream chip companies, we will extend to all aspects of semiconductors. In the field of semiconductors, we will look for opportunities that we can lead, not only in many chips but also in various areas such as materials, equipment, and software.

Second, robots and automation.

Third, double carbon emission reduction is a new energy source that we focus on, including solar energy and lithium batteries.

In addition to the fields that have been deployed, we will do some exploration in the area of new materials, including bio-based materials. For another example, we are investing in new computing platforms, such as photonic computing.

Question: Recently, some domestic investors have gone to Southeast Asia to look for opportunities. What do you think?

Xia Zhijin: The fact that domestic investors are going to Southeast Asia is not new. There was a wave in 2015 and 2016. At that time, many domestic investors went to Southeast Asia to invest in local Internet companies. Because the domestic mobile Internet feels that there are few significant opportunities, Southeast Asia is about five years behind China.

Recently, some people are talking about investing in Southeast Asia. Chinese investors should not need to go to Southeast Asia to make a systematic layout. The stage of entrepreneurship development in Southeast Asia may remain in the stage of entrepreneurship in China's mobile Internet. Suppose these funds are now going overseas to invest. In that case, they may also want to copy the experience of investing in mobile Internet in China to Southeast Asia, but whether it can be successful or not, is there any great difficulty? Of course, there are also some big companies in Southeast Asia, including Donghai Group, Grab, and so on. But Southeast Asia is a market that is not easy to do, and we are more cautious. Investing locally requires local resources and talents. There are more than ten countries in Southeast Asia with different populations, religions, cultures, etc.

In addition, Internet companies, Internet financial companies, and mobile Internet are currently more active in Southeast Asia. Whether these companies can run out may also need to be observed. Third, the domestic market is becoming more and more friendly to investors and early-stage technology investment funds. There is no need to put so much energy overseas. Fourth, there are few hard technology investment opportunities in Southeast Asia, including medical technology investment opportunities. For a long time, only China has had such options.

Question: The China Securities Regulatory Commission has recently begun to allow PE and VC to distribute shares in kind to investors. What do you think about this?

Xia Zhijin: On October 14th, the China Securities Regulatory Commission issued a document stating that it agreed in principle to carry out a pilot program for private equity funds and venture capital funds (from now on referred to as "private equity venture capital funds") to distribute shares in kind to investors, enriching the exit channels for private equity and venture capital funds.

We haven't actually done that yet, and I think there will be more in the future. But from our point of view, we are willing to complete the distribution immediately after these companies go public. The best way is to bring limited distribution to LPs unless individual LPs want to hold stocks, and then they understand the secondary market. Then He is willing to wait for better sales opportunities in the secondary market, but there are few people with this ability in our current LPs. Therefore, it is more to say that after the listing, we try our best to sell stocks and get back cash to distribute to them.

National Business Daily 2022-10-31 19:11:49

Reporter of NBD： Yao Yanan Edit of NBD: Zhao Yun

On October 31, L Catterton, the world's largest consumer private equity fund, announced that it has recently completed the first closing of its first RMB fund, with a target size of 2 billion yuan. L Catterton officially announced the Chinese name "Luwei Kaiteng," and the first phase of the Luwei Kaiteng RMB Fund landed in Chengdu High-tech Zone.

Initial Closing is also called first closing. When the fund manager believes that the minimum subscription target has been reached, the fund can be closed, and a notice of actual payment will be issued, which is the "first closure" of the fund. After the fund's first closing is announced, the accountant will record the investor's subscribed capital contribution in preparation for the first withdrawal.

Under the background of the cold consumption investment, the landing of this fund has undoubtedly injected a cardiotonic into the industry. In addition to L Catterton, several foreign investors have recently expressed confidence in the Chinese market. Not long ago, Temasek's veteran GP Vertex Investments announced that the new US dollar fund would raise more than expected. About 90% of the new fund will be invested in new Chinese technology companies.

 

The market size advantage is significant, and Long-term optimism about China's consumer industry development. 

According to public information, L Catterton was formed by the merger of L Capital of the LVMH group and the US private equity firm Catterton, which currently manages six funds on five continents with $33 billion in assets under management. The LPs of this RMB Fund are mainly composed of local financial contribution platforms and domestic and foreign industry investors, including the industrial capital of the world's leading consumer enterprises, food, and beverage industry giants, beauty and apparel listed companies, etc.

Regarding investment strategy, according to media reports, 2/3 of the first phase of the RMB fund will be used to invest in early-stage companies and 1/3 in growth-stage companies. The investment direction will be concentrated in eight segments: going overseas, beauty and personal care, food and beverage, pets, medical and health, consumer technology, new retail, and clothing and fashion.

In the past two years, the primary market consumption track has changed a lot, from full pursuit to the end of last year began to cold. Then this year continued to tighten, but overall, investors' long-term tone on the consumption track has not changed, optimistic that there are foreseeable opportunities to cross the cycle and national boundaries; this month, news of fundraising in the consumer track is frequent, the well-known consumer investment institution Black Ant Capital announced the completion of the third phase of RMB fundraising on October 10, the amount of up to 2.5 billion yuan, LPs are mainly composed of market-oriented fund of funds, insurance institutions, and industrial investors, as well as government guidance funds at the end of the closing period, Black Ant Capital managing partner He Yuzeng once said that in the next decade, Black Ant Capital would bet on the sinking market, technological innovation and spiritual and cultural consumption. On October 9, NX Fund announced the completion of the first phase of the US dollar consumer fund, an early-stage investment institution focusing on the new consumer field. Its latest fund will focus on the innovation of the entire consumer industry chain, including technology-driven supply chains, product-driven new brands, efficiency-driven new channels, etc.

Overseas LPs increase their investment in China.

Recently, several foreign-funded institutions and overseas LPs have expressed confidence in the Chinese market; on 18 October, Temasek's veteran GP Vertex Investments revealed that the fifth phase of the US dollar fund had reached US$500 million, with all investors coming from overseas. More than 90% of the fund's funds will be invested in China. Zheng Juncong, the managing partner of Vertex Investment, said in an interview with the media that Vertex Investments mainly invests in China's early-stage technology-based enterprises, including cutting-edge technologies in semiconductors, new materials, medical and other directions, based on China's enormous economic volume, coupled with a stable financial and market environment, even if the current global climate changes a lot, investors believe that investing in early-stage technology projects in China is a recent investment opportunity.

According to data from Zero2IPO Research Center, 30 foreign currency funds completed a new round of fundraising in the first half of 2022, with a total disclosed amount of about RMB46.709 billion. The reporter noted that in addition to the institutions mentioned above, in July this year, according to foreign media reports, Sequoia China also completed a new phase of about $9 billion fundraising, which was not only supported by several long-term international well-known LPs, including sovereign funds, charitable funds, university endowments, etc. but also attracted the participation of many new LPs, mainly from the United States, Europe, the Middle East, Asia, and other regions. It is understood that Sequoia's round of fundraising received more than 12 billion US dollars of subscriptions, oversubscribed by 50%, which shows that international funds highly recognize the Chinese market. The new fund will continue to focus on investment in technology, consumption, and medical and health fields.