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Western firms watch China VC opportunity slipping away

When I first started covering private markets a little over a decade ago, I was based in Hong Kong, and covering China was a large part of my beat. Back then the market was smaller, but relations between China and the West were warmer.

The landscape has since changed. Much of the old optimism among investors has diminished as the divide between China and the West widens, and fund managers are feeling the effects.

The latest example of this came Thursday, when a US congressional report accused several high-profile VC firms of pouring as much as $3 billion into Chinese companies linked to the military. The firms weren’t reachable for comment, but what we do know is that some—including Sequoia China, IDG Capital, GGV Capital and Qualcomm Ventures—played major roles in building Asia’s private markets industry and they form a large part of it today.

What the US government will do next is uncertain, but it doesn’t bode well for the many investors that hitched their fortunes to China’s growth story. It will also likely be of further detriment to investor appetite coming from the West.

China’s VC industry still has appeal for investors. It remains the largest economy in the world’s most populous region, and many of the fundamentals that drew investors in the first place remain—growing wealth, increasing innovation and changing demographics. But its relationship with the rest of the world is shifting. Indeed, some firms have either pulled out or at least spun out their China activities as a result—as was the case with Sequoia China and GGV Capital’s Asia business.

As US and European investors lose their appetite for Chinese private markets, other sources of capital—which are less constrained by political anxieties and security concerns—will be happy to step in. Marcia Ellis, a law partner and global PE chair at Morrison Foerster, told Asian Investor that Chinese PE managers have already started tapping Middle Eastern investors who are keen to step up their Asia exposure.

More concerning than China’s VC prospects is its gradual decoupling from the West, which undermines the free movements of capital, talent and innovation between the world’s largest economies. To be sure, there is still money to be made in China, and the broader Asian growth story remains compelling.

However, investors coming from the US and Europe should be prepared for business in China to grow more difficult before it gets better.

Featured image by baona/Getty Images

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