Starting in the 1990s, international capital firms have attempted to enter the Chinese capital market for its plentiful opportunities. During the following decades, international VCs, asset management corporations and investment banks participated in the development of the Chinese tech industries and capital markets in various ways.
The Chinese government has claimed multiple times that it will open the financial sector much more to the world's investors in the new decade. EqualOcean has looked through 30 years of history from the records of international capital in China and generated a list of the top 50 international institutes that have shown the best performance in the Chinese private and secondary markets.
Chinese IT industry of the past 20 years: a feast for international VCs
When viewing the development history of the Chinese IT industry, one can easily find that foreign investment institutes and individuals played vital roles. For the 10 Chinese tech companies with the highest market value, Venture Capital firms around the world are on the list of their main investors.
20 years ago, SoftBank put USD 20 million into Alibaba, in an apparently ‘high-risk’ investment. Now the value of the shares has exceeded USD 100 billion. The investment is considered one of the most profitable in history. From then on, international VCs with long-term vision started to create legends in the Chinese capital market.
Among the world top VCs, Sequoia Capital and IDG Capital are the two most successful in localization in China. In 2005, Sequoia Capital China was established by Sequoia Capital and Neil Shen (who is also the founder of Trip.com). During the next 15 years, Sequoia China invested 800+ target companies, including most industry leaders in different sectors of the Chinese high-tech industry. Continuous successful investments have made Sequoia China a top VC in the world, even when considered independently of Sequoia. In 2018 and 2019, Neil Shen was ranked 1st in the Forbes Midas List, proving his incredible achievements in pushing startups to become tech giants.
Very similarly, Hugo Shong introduced IDG Capital into the Chinese market in 1993; over the next several decades, IDG successfully invested in a list of tech giants including Baidu, Tencent, Trip.com, Pinduoduo, et al. The Chinese division has become the most profitable part of IDG Capital. IDG Capital has in turn become a great force behind the development of the Chinese high-tech industry.
Venture Capital firms like Sequoia China and IDG have comprehensive partnership systems. Internal incentive systems stimulate their experienced local teams to dig deep into different industries in China, which enables them to invest in high potential target companies by early rounds (mostly before Series C). High profit rates, along with their broad international outlook, in turn, increase their reputation and exposure, which provide them more chances in investing in newborn startups.
Besides VCs from the US, investment companies around the world appear in the Chinese private market. During the past 10 years, Temasek Holdings (Singapore) has invested in more than 150 startups in China, including companies in the healthcare, enterprise services and e-commerce sectors. It holds shares of DiDi, Meituan Dianping, and Kuaishou, which are all considered among the most effective Chinese Internet companies. Other international investment institutes which have an emphasis on the Chinese market include Baillie Gifford (England), Investor AB (Sweden), BVCP (Russia), etc.
Investment banks, government-owned entities and tech giants: hot money is always interested in China
Besides top VCs, many worldwide investment banks also have a long history of China primary market investment. As early as 1999, Goldman Sachs became the first foreign institutional investor in Alibaba (USD 5 million). Fast forward to 2020, Goldman Sachs has an investment portfolio that includes Lufax (largest Chinese online investment platform), Zhihu (Chinese Quora), Renrenche (online second-hand car trading platform). During the recent upheavals around the new Chinese IT industry, most world-leading investment banks allocated funding to the Chinese tech industry. Compared with VCs, investment banks usually prefer more stable and steady investments in China. They mostly invest after the Series D, with high investment value on each target, focusing on promising companies who have already been recognized by the capital market.
Many state-owned investment institutes also play active roles in Chinese tech industry development. Since 2015, CPPIB (Canada Pension Plan Investment Board) has invested billion-USD-level investments in Meituan Dianping and Ant Financial, helping them become world-famous unicorns. Other institutes, such as GIC (Government of Singapore Investment Corporation), QIA (Qatar Investment Authority) and the Ontario teachers’ pension fund have all participated in the financing of Chinese tech giants. Backed by a glut of capital, foreign government-owned institutes usually enter China not only through VC deals, but also M&As, real estate and other traditional finance tools.
Surprisingly, some of the world’s tech giants, such as Google, have been in the Chinese primary market for decades. Before 2010, Google invested in Chinese internet companies with similar functions as itself, such as Baidu and Tianya Club (the most popular Chinese forums in the 2000s). Recently, Google had a more diversified investment portfolio with companies in hardware, healthcare, webcast platform, etc. Similarly, Yahoo is known as one of the main shareholders of Alibaba.
Secondary market: the more and more appealing A-shares
Since the QFII (Qualified Foreign Institutional Investor) program was set up in 2003, the world’s largest financial institutes have entered the Shanghai and Shenzhen Stock Exchange with great passion. In the next two decades, the channel for foreign investors to invest in the Chinese secondary market will get more and more complete. In September 2019, China announced the cancellation of the quota and country/region limitation, which further eased the criteria of oversea investors.
The asset management departments of most world-top investment banks like JP Morgan, Goldman Sachs, and Morgan Stanley have their China A-shares funds. As equities of an emerging market, A-shares both have a high yield and are backed by complete regulations compared with competitors from emerging markets, which is highly attractive to most institutional investors.
As Global index compiler MSCI announced to increase the weight of mainland Chinese stocks (A share) in the MSCI Emerging Market Index from 2.55% to 4.1%, another billions of dollars will enter the Chinese capital market, mostly from investment companies who follow the MSCI index.
Most top asset management corporations have set Greater China Region funds. Both Fidelity Investments and BlackRock have funds with an asset value exceeding USD 1 billion. Traditional investment management firms like AllianceBernstein and Neuberger Berman also have their long-term China funds.