US private equity investments in China sink as Asia-Pacific investors pivot

The announced value of US private equity and venture capital investments in China fell sharply in the first half of 2024, as tensions between China and key trading partners, investment restrictions and an uncertain outlook for the country's economy prompted investors to seek other opportunities in Asia-Pacific.

US private equity firms invested a total of $650 million across 45 deals and funding rounds between Jan. 1 and June 30, down 88.9% in value compared with the same period in 2023, according to S&P Global Market Intelligence data. The deal pace also slowed, with the number of transactions declining 23.7% from the year-ago period.

The annual investment total in 2024 is on track for the lowest year since at least 2018, the data shows.

Concerns over the strength of the Chinese economy and geopolitical tensions between China and key trading partners — including the US, which restricted investment in sensitive segments of China's technology sector — are just two factors souring investor sentiment toward the country, said Gavin Geminder, global private equity leader at KPMG.

A stringent review process for public listings on overseas exchanges is also clouding exit prospects for private equity investments in China, Geminder added.

"In light of these challenges, private equity firms are exploring alternative investment opportunities in other Asian markets," Geminder wrote in an email.

On track for decline

In 2024, US private equity deals in China appear to be headed for a third consecutive annual decline in both volume and value.

The quarterly value of US private equity and venture capital investments topped $1 billion just once since the final quarter of 2022, hitting $5.42 billion in the second quarter of 2023, according to Market Intelligence data. The value accumulated in that standout quarter is due almost entirely to just two deals: Bain Capital Investors LLC's $3.16 billion take-private deal for WinTriX DC Group, the hyperscale datacenter operator then known as Chindata Group Holdings Ltd.; and a $2 billion funding round for Nanjing Xiyin E-Commerce Co. Ltd., the parent of fast-fashion retailer Shein.

The drop-off in private equity-backed deal activity coincided with a massive shift in investor sentiment toward China. A Probitas Partners private equity survey for 2024 found just 3% of institutional investors viewed China as the "most attractive" market in Asia, down from 58% in 2021.

Shifting Asia-Pacific focus

Investors' more cautious stance toward China has prompted private equity firms to push further into other Asia-Pacific markets, Geminder said.

– Dig into private equity fundraising trends in the first half of 2024. – Read about pension fund-backed deals in the second quarter. – Catch up on private equity headlines.

"Both India and Southeast Asia have become more frequent destinations for private equity investments due to their fast-growing economies, growing middle class and infrastructure development. Additionally, Japan has become more open to private capital in recent years," Geminder said.

Private equity- and venture capital-backed investments in Japan increased more than 52% in 2022 and 2023 compared with the previous two-year period, Market Intelligence data showed.

Technology restrictions

Investments in China by US-based venture capital firms fell to their lowest level in a decade in 2023 as trade tensions between the two countries escalated. Venture capital firms tend to target technology startups, and the US in 2023 curbed outbound investment in AI, quantum computing and specific semiconductor companies in what the Biden administration called "countries of concern," including China, citing national security concerns.

Even with the restrictions, China's technology, media and telecommunications sector was by far the top destination of US private capital in the second quarter, with 12 deals totaling an announced value of $300.7 million, more than seven times the aggregate $41.4 million attracted by the healthcare sector.

Largest deals in H1 2024

A $112 million funding round for clinical-stage biotechnology company ProfoundBio (Suzhou) Co. Ltd., led by Hong Kong-based Ally Bridge Group, was the largest deal with US private equity investor participation targeting a China-based company in the first half. It was one of two companies on the top 10 list in the healthcare sector, while six of the 10 were technology, media and telecom businesses.