Frost & Sullivan, in collaboration with LeadLeo Research Institute, released the '2023 CFO White Paper on China's PE/VC Fund Industry'

Mr. Li Zheng, Dean of LeadLeo Shenzhen Research Institute

This white paper uses a combination of surveys and interviews to research over 130 current CFOs from mainstream PE/VC institutions in China between July and September 2023. It has compiled the current development status of 'fund raising, investment, management, and exit' activities within the CFO's affiliated investment institutions, and sorted out the views and insights of each CFO on digital transformation and business internationalization trends.

01 Number and Scale of PE/VC Fund Registrations Approved in 2023

According to the latest statistics, in July 2023, the number of newly filed private equity and venture capital funds in China decreased by 32.1% and 28.3% respectively compared to the same period last year, while the scale of newly filed funds decreased by 24.9% and 34.1%, respectively.

The main reasons for the dual decline in the number and scale of newly filed PE/VC funds are the continuous uncertainty in the primary market, difficulties in raising capital for PE/VC firms, a slowdown in their investment pace, and a cautious attitude towards the establishment of new funds. At the same time, in May this year, the 'Private Investment Fund Registration and Filing Measures' were officially implemented, clarifying the regulatory stance of supporting excellence and restricting inferiority, which will further limit the uneven quality of the PE/VC industry.

Registration of PE/VC Fund Managers in 2023 and Their Status as Active or Inactive Fund Managers

In July 2023, the number of private equity and venture capital fund managers who completed procedures in that month was 10, a significant 86.3% decline compared to the same period last year. There were a total of 21,996 active private equity fund managers, including 13,135 PE/VC fund managers, a decrease of 11.1% compared to the same period last year.

In 2023, the PE/VC industry in China has undergone a process of survival of the fittest and accelerated liquidation of existing assets. Many fund managers registered with the Asset Management Association of China (AMAC) have found it difficult to raise new funds, and some have even struggled to invest in a project during the first half of this year. In July this year, the 'Regulations on the Supervision and Administration of Private Investment Funds' were released, marking the birth of the first administrative regulation for the private investment fund industry, which will promote the standardized operation of private funds throughout the entire process in the future. Under the backdrop of strong supervision, private equity venture capital fund managers have recently actively carried out self-inspections and improved their compliance risk control systems.

Changes in the Proportion of PE Funds and VC Funds in 2023

As of July 2023, there were 152,878 active private equity funds, including 31,393 PE funds and 21,725 VC funds. In 2022, the number of existing PE funds accounted for 21.7% of private equity funds, while the number of existing VC funds accounted for 13.3%. In 2018, their respective proportions were 36.4% and 8.7%, indicating a trend where the proportion of private equity investment funds has declined while the proportion of venture capital investment funds has increased. This is mainly due to frequent underpricing of new listings, an inversion in valuation between the primary and secondary markets, and IPOs no longer being the mainstream method for institutions to exit projects. The consensus among investment institutions has shifted towards 'investing early' and 'investing in smaller companies'.

In the first half of 2023, the total amount raised through A-share IPOs was 209.677 billion yuan, a year-on-year decrease of 32.78%; during the same period, there were 173 IPO projects, a year-on-year increase of 1.17%. As the first half after the full implementation of the registration-based IPO system, the total number of A-share IPOs increased. However, the decline in the amount raised per company is an important feature of the IPO market in the first half of this year. During the same period, the average amount raised per project was only 121.2 million yuan, a year-on-year decrease of 33.56%. Among the 173 new stocks listed in the first half of 2023, the proportion of those that fell below their issue price on the first day of listing reached as high as 20.81%.

01 Nature and Investment Direction of the Funds Held by the CFO's Investment Institution

Among the PE/VC institutions participating in this survey, 44.3% operate RMB funds, 9.2% operate US dollar funds, and the number of dual-currency funds operating both RMB and US dollars accounted for 46.6%. Due to geopolitical and uncertainties, the Chinese PE/VC industry has gradually shifted from being dominated by US dollar funds to being dominated by RMB funds. On one hand, the investment direction of PE/VC has migrated towards hard technology and intelligent manufacturing fields. At the same time, the registration-based system has broadened the exit channels for private equity funds. Many science and technology innovation projects are more willing to choose RMB funds for financing due to considerations such as policies and listing.

02 Exit Strategy of Funds in the Investment Institution where CFO Works

In terms of fund exits, among the PE/VC institutions surveyed this time, 11.5% of the investment firms made significant adjustments to their fund exit strategies. The adjustments were mainly reflected in: 1) Diversification of exit strategies, with a greater emphasis on mergers and acquisitions; 2) Faster exit speeds, even seeking opportunities for cross-cycle exits, rather than relying solely on listing exits, with a clear reduction in IPO exit methods; 3) Step-by-step exits, not waiting for one-time exit opportunities; 4) GPs shifting from showcasing IRR to DPI.

One of the trends in the PE/VC industry in 2023 - Business Internationalization and Overseas Fundraising

Among the PE/VC institutions where CFOs participated in this survey, 33.3% of the institutions planned to establish or set up new overseas offices in 2023, with locations mainly distributed in Hong Kong (China), Singapore, the United States, and Israel. In addition, 20.0% of the institutions conducted overseas fundraising roadshows in 2023, with about 1-4 times of such events. At the same time, 46.7% of CFOs indicated that their institution's source of fundraising funds in 2023 had changed significantly, mainly due to the continuous increase in the proportion of overseas fundraising funds caused by difficulties in domestic fundraising in recent years.

In 2023, against the backdrop of difficulties in raising funds domestically, PE/VC institutions have gone global, with overseas fundraising demand continuing to climb. To facilitate the collection of overseas funds, PE/VC institutions have carried out overseas fundraising roadshows in Hong Kong, Singapore, the United States, and other locations in China. While domestic PE/VC institutions are experiencing a significant increase in demand for foreign capital, overseas institutions are also enthusiastic about investing in equity projects in China. However, there has been some 'supply-demand mismatch' in the cooperation between domestic institutions and overseas investors. Among the CFOs participating in the survey, 10% of the institutions reported that they encountered differences with overseas investors in terms of investment decision-making logic, thinking patterns, regional culture, and other aspects during the process of raising funds overseas.

Frost & Sullivan, in collaboration with LeadLeo Research Institute, has selected the '2023 PE/VC Firm CFO of the Year', '2023 PE/VC Firm CFO Special Contribution Award', '2023 PE/VC Firm CFO Digital Capability Award', '2023 PE/VC Firm Rising Star Finance/Law Director', '2023 PE/VC Firm CFO's Best Exit Practice Award', and '2023 Most Popular Third-Party Due Diligence' based on five dimensions.

Best CFO of PE/VC Institutions in 2023

2023 PE/VC Institutions CFO Special Contribution Award

2023 PE/VC Firm CFO Digital Competence Award

Newcomer CFO/Corporate Secretary at PE/VC Firms for the Year 2023

Top Third-Party Due Diligence Searches for Q1 2023

2023 PE/VC Firm CFOs' Best Exit Practice Award

During the writing of this white paper, support was provided by many CFOs from PE/VC funds such as the China Venture Capital and Private Equity CFO Association (CVCFO), Ernst & Young, Zhongxinghua Accounting Firm, Shanghai Lianchuang Investment, and Mr. Zhu Yifan, their CFO.

The CVCFO China Equity Investment Finance Directors Association is a non-profit industry association for venture capital and private equity investment funds, established in 2009. It currently has nearly 600 members, including financial staff from nearly 320 venture capital and private equity fund management companies located in Beijing, Shanghai, Guangzhou, Shenzhen, Hong Kong, Singapore, and the United States; Zhongxinghua Accounting Firm (Special General Partnership) is a national professional service institution for accounting, asset evaluation, finance and taxation, and engineering consulting, approved by the Ministry of Finance and registered with the State Administration for Industry and Commerce, with independent legal person status; Shanghai Lianchuang is one of China's earliest institutional innovation professional management companies engaged in venture capital. After 24 years of hard work, Shanghai Lianchuang has become an outstanding brand in domestic venture capital investment.

Here, Frost & Sullivan and LeadLeo express their sincere gratitude to them for their strong support in providing the perspective output for this report.