We recently met with many of our mainland-based Chinese USD fund managers, industry friends from the fund formation business, placements agents and public accounting firms to discuss the fund management landscape as COVID-19 mitigation measures in Asia ease. One key theme persisted during our dialogues—the uncertainty around the geopolitical tension between China and the US, and its potential impact on the investment flow into China.
With China re-opening, a gradual return to normalcy is expected, but the extended COVID-19 restrictions have taken their toll. Investing activities in China slowed down drastically during the past three years. Traditional investors who are keen on investing in China have pulled back due to an uncertain outlook on the China/US relationship. Furthermore, the capital market has been unfavorable to allowing orderly exits of portfolio companies at an attractive return profile. All these forces add up to one outcome—a difficult fundraising landscape for USD funds.
To counter this trend, USD fund managers are actively seeking new sources of capital in regions such as Europe and the Middle East. The narrative around their investment thesis is also evolving towards a more regional/global strategy, rather than a pure China play. Now that China and other regions are back open for business, a number of managers are looking to travel abroad in the second half of 2023 to further engage their investor base and gauge interest in re-entry into China. Many are thinking of hosting their annual investor meeting in China, instead of the traditional offshore locations.
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