Global titans are entering the venture capital (VC) scene in China. The website of the Shanghai Market Supervision Administration recently updated a significant piece of information, revealing that the globally renowned sports car brand Porsche and China International Capital Corporation Private Equity (CICC PE) will jointly establish a fund in China to engage in private equity investment. This signifies another global giant entering the Chinese VC/PE industry, following the footsteps of the global luxury goods leader, LVMH Group, which previously launched a Renminbi (RMB) fund.
Looking back, Chinese VC/PE firms used to seek global heavyweights as Limited Partners (LP) when raising funds. However, this scenario has changed, and China’s emerging industries have grown into an undeniable force, prompting more global giants to heavily invest in China.
I.
This is an extraordinary scene.
Last year, the operation of L Catterton, the world’s largest consumer-focused private equity fund under the LVMH Group, sent shockwaves through the VC/PE industry. At that time, they made a dynamic announcement about raising a RMB fund with a scale of 2 billion RMB in China. Surprisingly, LVMH even came up with a Chinese name, “路威凯腾” (Lu Wei Kai Teng), for L Catterton. This RMB fund landed in the high-tech zone of Chengdu, Sichuan Province. After its establishment, the fund quickly carried out a wave of investments in the new consumer sector, with well-known companies like Yum China and Heytea having the shadow of “Lu Wei Kai Teng.”
LVMH Group’s foray into the local VC scene in China energized professionals in the VC/PE industry. Historically, the VC/PE circle, mainly dominated by USD funds, saw foreign funds and LPs holding a superior position. Even when they invested in China, it was indirect conversion into USD assets. LVMH Group’s unexpected move undoubtedly broke the longstanding dominance of “foreign capital.”
Analysts widely believe that the era of “RMB funds” has arrived.
In reality, LVMH Group’s decision to raise RMB funds is related to the global economic environment and is essentially a response to the “USD fund winter.”
Before the birth of “Lu Wei Kai Teng,” globally USD-denominated VC/PE experienced an epic collapse. The primary cause of this collapse was the United States, which claimed to be the “investment headquarters of the USD system.” During that period, the world faced inflation, and the Federal Reserve implemented a series of aggressive strategies, raising interest rates seven times in a row, causing the “USD system” to enter a state of turmoil.
This directly led to a significant reduction in USD assets, and the VC/PE industry, as the leading indicator of the market’s direction, was hit hard. According to incomplete statistics, from 2020 to 2022, the number of transactions by USD funds plummeted from 9,767 to 2,997. In terms of the total exit transaction volume, a metric closely watched by global LPs, USD funds fell from $14.27 trillion to $308.8 billion.
These two sets of data reflect the grim situation of USD funds. As one of the world’s largest investment groups, LVMH naturally did the math. In 2020, LVMH Group was already hit by the weakening global liquidity and sluggish consumption, resulting in its lowest profit in a decade. However, in China, there were signs of recovery in the sales of LVMH Group’s products. LVMH Group’s CFO, Jean-Jacques Guiony, analyzed, “There has been a clear improvement in trends in Asia, especially a strong rebound in China.”
Starting in 2021, LVMH Group increased its focus on the Chinese consumer market, experiencing a recovery in performance. According to the financial report, LVMH Group achieved a sales revenue of €64.2 billion in 2021, a 44% increase from 2020. Bernard Arnault, Chairman and CEO of LVMH Group, excitedly stated, “In 2021, we found that Chinese customers purchased more goods than in 2019.”
Bernard Arnault believes that LVMH Group needs to establish a “harmonious relationship” with Chinese customers. Consequently, they intensified their presence in China, entered the forward-looking market, and thus, the landing of LVMH Group’s first RMB fund, “Lu Wei Kai Teng.”
With LVMH Group leading the way, the establishment of RMB funds by foreign capital has gradually become a global trend.
II.
Now, Porsche has also come to China to venture into VC.
According to information from the Shanghai Market Supervision Administration website, Porsche and CICC PE will jointly invest in establishing a fund, following a similar model of a joint venture. CICC PE holds a 1.9% stake in the joint venture as a general partner, while Porsche holds over 30% as a limited partner. This indicates that Porsche is fully committed to VC in China.
In fact, the background of Porsche’s entry into VC in China has similarities with LVMH Group; the days for USD funds this year have become more challenging.
The two major indicators of global USD VC/PE are Sequoia Capital, known as the “VC king,” and KKR, the “PE overlord.” These two institutions were originally proud “money-making machines” based globally, especially in forward-looking markets.
However, these two “money-making machines” are having a tough year. Sequoia Capital laid off employees and reduced fund management fees at the beginning of the year. In the middle of the year, it separated its well-performing Chinese business, giving rise to the independent entity, Sequoia China, under the leadership of Shen Nanpeng, who is hailed as the “global VC leader.”
KKR is also having a difficult time; it disbanded its PE investment teams in the consumer, media, and retail sectors. According to its third-quarter report for 2023, KKR recorded revenue of $777 million, below the average analyst expectation of $800 million. Apart from falling short of revenue expectations, KKR’s net profit for the third quarter plummeted by 71% compared to the same period last year, reaching $81.3 million.
While the world expected that the record high in the U.S. stock market this year would boost USD assets and invigorate USD funds in forward-looking markets, it turns out that the performance of global VC/PE leaders has not improved, simultaneously scaring away USD LPs.
As USD investments fail to generate profits, the value of RMB investments becomes more evident. Therefore, savvy global giants are changing their strategic thinking, just like Porsche. Of course, Porsche’s other major strategy for entering China is to seize the wave of global new energy vehicle manufacturing in the new economic era.
During the era of traditional gasoline sports cars, Porsche was one of the most competitive giants. However, facing the global trend of the transition between old and new energy sources, Porsche’s actions have been notably slower. O.B. Müller, Chairman of the Management Board of Volkswagen AG and Chairman of the Board of Porsche AG, has expressed more than once that the dominant Porsche in gasoline sports cars has been slow to act in the direction of electrification.
Some media have pointed out that Müller’s implication
is that “Elon Musk’s Tesla has unexpectedly surpassed Porsche.” In response, Porsche has invested three times in electric sports cars similar to Tesla: the Croatian electric car company Rimac. It is said that the performance of the electric sports cars produced by Rimac has surpassed Tesla’s Roadster at one point, although its industrial chain is far from being as complete as Tesla’s.
Looking at Porsche venturing into VC in China, it raises the question of whether it aims to leverage investments to propel an entire industry chain. Currently, there is not much information available, but the information from the location selection of the fund, as revealed by the Shanghai Market Supervision Administration, unintentionally suggests that the regulatory location is in Shanghai.
If Porsche does VC in the vicinity of Tesla’s factory in China, it will bring variables to the global new energy vehicle landscape.
III.
Undoubtedly, spring is coming for the VC/PE industry.
This year, USD funds are facing difficulties, causing VC/PE investors to once again cry out about the “winter.” Zhang Suyang, founding partner of Volcano Capital, told the media, “From the 1990s, as far back as I can remember until now, this year feels the most challenging.”
From a statistical perspective, as of October this year, the number of equity and venture capital funds in China has declined from the peak of 18,000 to 15,000. The decrease in the number of funds often implies that “VC is not going well.”
It is not unusual for VC to face challenges in the VC/PE industry. Quoting a well-known investor, “There are VC firms that cannot continue every year. Fundraising and investment have never been easy; it depends on everyone’s own strength and core.”
“Like us, who invest in deep tech, if those who invest in the internet try to invest in deep tech, they will definitely not be able to continue.” In the era of the new economy, with the wind shifting towards deep tech, the professional competence, resource technology, and investment literacy of investors face a significant test.
However, under the influence of the “USD fund winter,” domestic dual-currency funds (RMB and USD) will indeed face some challenges. For example, this year, it was reported that a certain dual-currency fund carried out a review and downsizing of its investment business. The good news is that the entry of global giants like LVMH Group and Porsche into VC in China will to some extent revitalize the equity market.
More importantly, not only LVMH Group and Porsche, but more and more global giants are deciding to go long on China.
In October of this year, Lixiang Automotive announced that Stellantis, the parent company of Maserati, would invest 1.5 billion euros to acquire approximately 20% of the shares of Lixiang Automotive, a Hong Kong-listed company, becoming its strategic shareholder. Although L’Oréal, a global leader in cosmetics, did not directly invest, it supported VC/PE in the form of an LP. Fabrice Megarbane, North Asia President and CEO of L’Oréal, said, “Over the past 20 years, L’Oréal has continuously increased its investment and presence in China. Currently, China has become the second-largest market for the L’Oréal Group.”
Megarbane expressed the innermost feelings of global giants, saying, “Understanding China, investing in China.”
There was a time when global giants bet on China through investments and joint ventures. With the explosion of China’s emerging industries and the decline of USD investments, RMB funds and investments have become the preferred way for global giants to go long on China.
The era of RMB funds is about to take off.