New research from eFront, a financial software and solutions provider dedicated to Alternative Investments, has shown that Chinese venture capital funds are outperforming those in the US and Europe in terms of return on capital.
A detailed analysis of venture capital funds globally shows that Chinese funds of vintage years 1997 to 2018 have delivered a returns of 1.79x (total value to paid-in), comparing favourably with US funds on 1.70x and Western European vehicles on 1.75x.
In addition, the research shows that Chinese funds take longer to reach maturity and have demonstrated longer hold periods for investments. In terms of time to liquidity, Chinese funds average close to 5.5 years, while US and Western European funds have a time to liquidity of under 5 years. The same is true for the global average.
Some of China’s performance is, however, still in the making. The maturity of Chinese VC funds, measured by the distributed divided by the total value, sits at only 40 per cent, while global funds exceed 50 per cent and US funds exceed 60 per cent.
Chinese VC funds also divest more slowly than their peers from other geographical regions. There are multiple possible reasons. One is the difficulty of IPOs, as local authorities tightly control public listings. Another is that local companies take longer to gather the critical mass of activity and thus attract local and international buyers. In addition, local regulations on ownership limit international acquisitions and local companies are more difficult to assess for buyers due to higher uncertainties.
The consequences are that assessing the performance of Chinese VC funds is more difficult as it materialises over a longer period of time. It might also be more volatile, as IPOs are determined not only by market conditions, but also non-financial factors.
