During the first six months of 2023, China"s VC/PE market had few exciting news. Some media outlets" negative comments, industry professionals’ complaints and the industry"s declining indicators continuously showed a sense of pessimism in the primary market.

However, negative views and laments are subjective perceptions that can vary among individuals. Only hard data can offer a glimpse of what is truly happening in the market. Although there is a decline in key indicators, some subtle changes are occurring in the primary market based on the data.

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China’s VC/PE industry Stays Active

Despite the pessimistic sentiment about fundraising stagnation in the primary market, money raised by VC/PE funds in China in the first half of 2023 only experienced a marginal decline of 5% when compared with the same period in 2022 but was still much higher than that in the first six months of 2021. The number of funds that reached their fundraising targets witnessed a significant year-on-year surge of 22%.

Data show that in the first half of 2023, there were 3,289 newly launched funds, representing a 22% year-on-year increase. Meanwhile, the average new fund size was 223 million RMB, indicating a 22% reduction compared with the previous year.

Renminbi funds outperform dollar funds

In the first half of 2023, the number of renminbi (RMB) funds, private equity funds raised in China’s currency RMB,surged 22% year-on-year to a total of 3,266. The total amount raised in RMB was 691.917 billion yuan, representing a 5% decline year-on-year. However, during Q2, RMB funds showed significant growth, with a 12% increase in fundraising amount and a 5% rise in the number of funds when compared with the previous quarter.

As for U.S. dollar-denominated fundraising, in the first half of the year, there were 23 funds raising a total of 42.228 billion yuan, representing a 23% and 10% decrease, respectively, compared to the same period in 2022. Nevertheless, this decline appears to be moderate when compared to the substantial 40% decline in U.S. dollar fundraising seen in the first half of 2022.

When compared with Q1, U.S. dollar funds experienced a sharp 47% decrease in Q2. If this trend continues, fundraising in the U.S. dollar in Q3 may continue to decline.

There is much open information on dollar funds on the Internet. In the first half of this year, notable cases include Vertex Ventures, a wholly-owned subsidiary of Singapore"s Temasek Holdings, completing a US$390 million fundraising, and Monolith Venture Capital co-founded by former Sequoia China partner Cao Xi and former Boyu Capital partner Tim Wang, successfully raising nearly US$800 million.

State-owned funds and industrial fundscontinueto buy in asinvestment firms halve investment

The top three contributors to newly launched RMB funds in China"s equity investment market are government-related entities, industrial capital, and family offices or individuals, judging from the contributions from Limited Partners (LPs).

In the first half of 2023, despite an overall decrease in fundraising, state-owned funds and industrial capital LPs continue to buy in with their subscribed capital rising by 16% and 10% respectively.

State-owned LPs remain the main source of funding in China"s equity investment market. In the first half of 2023, the combined disclosed subscribed capital from state-owned LPs and LPs with state holdings accounted for 71.2% of the total.

Meanwhile, capital mainly flowed into large-scale policy funds, infrastructure funds and top-tier dollar funds.

Funds with raised capital above 5 billion RMB fall by 44.3%, while micro-funds account for66% of thenew funds

In the first half of 2023, funds with individual fundraising sizes ranging from one billion to five billion RMB became the backbone of the fundraising market, accounting for approximately 73% of the total raised capital and about 33.8% of the total number of funds.

Moreover, there were 16 large-scale funds with fundraising sizes of 5 billion RMB or above, which raised a total of 127.16 billion RMB, accounting for approximately 17.3% of the total raised capital. Large-scale fundraising showed a significant downward trend, with the number of funds launched declining by 36.0%, and the total amount raised decreasing by 44.3%.

The number of medium and small-size funds soared, with those raising less than 100 million RMB constituting approximately 65.7% of the total number of funds launched, but their total capital raised amounted to only 9.7%. Smallfunds with less than 100 million RMB are likely specialized funds, which also indirectly confirms the popularity of specialized funds this year.

IT and raw chemical materials become new darlings of VC/PE market

The Chinese equity investment market in the first half of 2023 showed a lackluster performance when compared with2022, with 3,638 investment cases, a 13% year-on-year decline, and a total investment amount of 292.965 billion RMB, down 7% year-on-year. However, Q2 data saw a notable recovery compared with Q1, with investment cases rising by 13% and total investment amount increasing by 21%. It can be observed that investment activity is gradually picking up from earlier this year, with the average single investment amount slightly rising by 6% year-on-year.

Semiconductors continue to decline,as AI drives the IT industry

The top five popular investment fields in the first half of 2023 were semiconductor and electronic equipment, biopharmaceuticals, IT, mechanical manufacturing and chemical raw materials and processing.

In Q2, funds began to flow towards IT and chemical raw materials and processing, while the semiconductor industry often mentioned by investors experienced a 6% decrease in investment amount when compared with the previous quarter.

The chemical raw materials and processing industry witnessed a growth rate of 28% in both the number of investment cases (218) and the total investment amount (18.792 billion RMB), when compared with the same period last year.

Before 2022, the IT industry had led the top five popular investment sectors. The IT sector ranked the third in Q1 and Q2 of 2023, with a total of 706 investment cases and 28.525 billion RMB investment amount or a 32% and 50% year-on-year decline, respectively.

The emergence of variables like ChatGPT triggered a small investment surge in the IT industry during Q2. The cautious attitude observed in Q1 gradually dissipated, with an investment amount surge of 94% and an investment event jump of 14% when compared with the previous quarter.

"The emergence of large language models and related technologies is continuously driving the second wave of entrepreneurial enthusiasm in China"s AI field, injecting new blood into the country"s digital economy. This wave will continue for several years," said Cheng Tian, a partner at Shunwei Capital.

As for the semiconductor and biotechnology fields, the two fields both experienced varying degrees of decline in investment amounts and events.

The semiconductor and electronic equipment sectors had a total of 813 investment cases and 63.163 billion RMB in investment amount, showing a 32% and 50% year-on-year decrease respectively. In the biotechnology/medical health sector, there were a total of 752 investment cases and 43.548 billion RMB in investment amount, representing an 8% and 15% year-on-year decline respectively. This indicates a diminishing enthusiasm among investors for these two tracks.

Old fieldspresent new investment opportunties

"The focus remains on cutting-edge technologies, low-carbon economy and life sciences, which are the strong suits of Yingke. However, we will lean towards delving deeper into more specialized areas within these major fields. After laying out essential nodes in the industrial chain, this year, we are seeking other directions with potential along the upstream and downstream of the industrial chain," said Chen Yulei, a partner at Yingke.

Companies that focus on cutting-edge technologies like semiconductor equipment and new materials play a crucial role in the chip manufacturing process. During the first half of the year, some innovative semiconductor equipment and materials companies emerged, including new etching equipment, improvements in photolithography technology and breakthroughs in mask technology. Another example is advanced packaging technology, which has become increasingly critical as chip sizes shrink, and functional requirements increase. The focus is on making chips smaller, lighter, and more efficiently integrated.

In the field of low-carbon investments, the emphasis is on finding genuinely valuable projects in an overheated environment. In the first half of the year, the core focus was on energy storage projects. Energy storage technology plays a significant role in addressing the volatility of renewable energy and balancing supply and demand. Additionally, continuous attention was given to improvements and new application scenarios for energy storage technology, covering areas like technological innovation and cost reduction, system integration and intelligent control, energy markets, energy supply chains and energy management systems. Specific examples include the continuous development of technologies such as chemical energy storage, air energy storage, and hydrogen energy storage, as well as large-scale storage projects that combine speed and quality.

Glory Ventures’ founding partner, Yang Guang, agrees with this approach. "Semiconductors, AI-driven software and new energy are our three main investment directions. We now focus on more promising specialized fields. For instance, in the past, we invested in large chips like GPUs, DPUs and CPUs in the data center domain. For specialized funds like ours that focus on early and small investments, we have already achieved comprehensive coverage in these areas. So now we are turning to invest in server transmission chips, analog chips, MCU, battery management chips and transmission chips. In the past, we invested in large chips in the automotive domain, but now we are deepening our layout in areas like MCUs, battery management chips, analog chips, and transmission chips."

Yang believes that having a forward-looking layout and delving deeper into the industrial chain is essential. For new entrants in the hard technology field, if their understanding and accumulated industry experience are limited, it will be challenging for them to discover opportunities in specialized tracks.

Vertex Ventures’ managing partner, Zheng Juncong, shares a similar perspective. "From a technological perspective, investing is not limited to the chips themselves. It is a very broad field, including upstream semiconductor equipment, equipment materials, equipment instruments and equipment software, which are still lacking in the Chinese market and present opportunities."