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Small and medium-sized VCs struggle to survive trillions of “zombie funds” in a dilemma Fund_Sina Finance_Sina.com

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Small and medium-sized VCs struggle to survive trillions of “zombie funds” in a dilemma Fund_Sina Finance_Sina.com

Source: Securities Times

Securities Times reporter Li Mingzhu Roman

The decline in the valuation of technology companies is combined with the chain reaction caused by the recent Silicon Valley bank explosion, and a large number of venture capital companies have difficulties in raising funds, making the phenomenon of “zombie funds” in the industry more prominent.

According to the latest data released by the Asset Management Association of China, as of February 2023, there are 31,100 private equity investment funds in China, with an existing scale of 11.09 trillion yuan. Xiong Gang, chairman of Australia Bank Capital, told the reporter, “China’s VC/PE actually exited only 4 trillion yuan, which is the cumulative exit scale data accumulated over the past 20 years.” That is to say, based on this exit speed estimate, At least trillions of private equity funds have actually been reduced to “zombie funds”.

Startup valuations fall

Small and medium-sized VCs struggle to survive

“I invested in a company in the field of innovative medicine before, about 20 million yuan. We want to exit, but it is a bit difficult. Now the market as a whole is not good, and it is difficult for them to continue financing.” Xiong Gang said after the last round of meetings. Reporter said.

In fact, since last year, the biomedical investment track has begun to diverge severely. Whether it is A shares or Hong Kong stocks, the IPO breakout of biopharmaceutical companies has become the norm. Statistics from the Securities Times reporter show that in 2022, a total of 22 healthcare companies will be listed on the Hong Kong stock market, 11 of which rose within 3% on the first day, and 6 that broke on the first day. Generally speaking, if the increase is less than 3%, investors will lose money in actual income after including new subscriptions and transaction fees. The secondary market is “voting with its feet” for biomedical innovation companies, which is completely different from the situation before 2021.

Not only biopharmaceutical companies, but also the global market’s valuation of science and technology companies is being lowered. According to Wind data, since January 2022 to March 22 this year, the Hang Seng Technology Index has fallen by 29.3%, leading the decline in global indexes, and the Nasdaq has fallen by 24.19%.

The chill in the secondary market spread all the way to the primary market, and spread to an earlier stage.

A reporter from the Securities Times learned that China’s largest unlisted technology unicorn, Bytedance, lowered its valuation to US$220 billion in the latest round of equity financing. ByteDance’s valuation reached US$500 billion in July 2021. It is down 56% from the peak.

From the perspective of overseas markets, the situation is also not optimistic. Take Tiger Global Management (Tiger Global Management), which was once invincible in the global venture capital circle, as an example. PitchBook data shows that in 2022, Tiger Global Management will reduce the valuation of non-listed companies of all its VC funds by 33%, and the loss will be as high as 23 billion. U.S. dollars (approximately more than 150 billion yuan), including TikTok parent company ByteDance and payment giant Stripe and fresh food e-commerce Instacart, etc., of which about 9 billion U.S. dollars in impairment occurred in the second half of last year. Under the turmoil of US technology stocks, the high valuation bubble of start-up companies has gradually burst, and established venture capital institutions such as KKR, Blackstone, and Goldman Sachs have also encountered setbacks to varying degrees.

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The cold wave is still continuing, and a large number of venture capital companies are also facing difficulties in raising funds. According to the latest data released by the Asset Management Association of China, as of February 2023, the number of newly registered private equity funds is 2,341, a decrease of 553 from the previous month, and a month-on-month decrease of 19.11%; there are 163 private equity investment funds, with a new filing scale of 11.753 billion RMB, down 58.5% month-on-month; 300 venture capital funds, with a new filing scale of 9.285 billion yuan, down 30.44% month-on-month.

Xiong Gang told reporters, “Many venture capital institutions’ early strategy was to exit through IPO. Even if they entered a year before the Pre-IPO listing, they would have a high premium and live a comfortable life. It is likely to break, and the sharp decline in the income of the secondary market has made the original model of covering 100% of the fund’s income through one or two IPO exits unfeasible, so it can only rely on mergers and acquisitions in the primary market. Simple understanding is that the front-end institutions find the back-end Institutions take over, but the back-end institutions are suppressed by the valuation reduction in the secondary market and will be very cautious. The financing relay race among peers cannot continue, the exit channels of venture capital institutions are not smooth, and enterprises cannot raise funds.”

According to Preqin data, global venture capital fundraising in 2022 will decline step by step after reaching its peak in the first quarter, and only US$20 billion will be raised in the fourth quarter, the lowest level since 2017. Guo Libo, the founder of LP think tank, pointed out in an interview that in 2022, the US venture capital industry, especially in the second half of last year, will have a large decline in exit and investment. LPs especially cherish the liquidity on hand. The Silicon Valley Bank incident made the venture capital industry even worse.

“Zombie Fund” Dilemma

Recently, the heads of overseas VC institutions have all expressed their emotions. Due to the soaring interest rates, the economic recession and the sharp decline in the valuation of start-up companies, it is difficult to raise funds, and a large number of “zombie funds” have emerged.

Maelle Gavet, CEO of Techstars, an American super-accelerator that has invested in more than 3,300 start-ups, said publicly in February, “We expect more and more zombie VCs, and the ones that still exist can continue to manage them. Existing funds have been unable to raise funds for the next fund, and this figure will be as high as 50% in the next few years.” This means that more than half of the funds may become “zombie funds”.

“Most of the small and medium-sized VC funds that were established a year or two before the epidemic have almost no bullets left.” The head of a fund of funds headquartered in the Yangtze River Delta revealed, “Some of these small funds came from large institutions and worked on their own. Yes, there are still some that seized the dividends of industry development and quickly accumulated wealth to enter the primary market during a specific period. Most of them are at the end of the first phase of fund investment, and the second phase of fundraising is entering a critical period. Many projects are still in development. If there is no exit or staged development, the investment ability has not been verified, and the winter is coming.”

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The current situation of Wu You, the founding partner of Jinghu Capital, who promised to donate 11 million yuan to his alma mater but did not fulfill it, is more representative. The Jinghu Capital he works for can be regarded as a typical domestic “zombie fund”. 4.75 billion yuan, 280 million US dollars (total equivalent to nearly 7 billion yuan). “In the past three years of the epidemic, the key investors of Jinghu Fund have also encountered a lot of pressure and difficulties. The launch of the new phase of the fund is also because potential investors have almost stopped worrying about the epidemic and the market environment, and Jinghu Capital’s business is difficult to maintain. I personally also fell into great difficulties.” Wu You said.

The latest data from the Asset Management Association of China shows that as of February 2023, there are 31,100 private equity investment funds in China, with an existing scale of 11.09 trillion yuan. Since the beginning of this year, 1,154 private equity and venture capital funds have been deregistered. Xiong Gang told reporters, “Many small and medium-sized investment institutions have been unable to raise funds for their next fund, and China’s VC/PE has actually withdrawn only 4 trillion yuan, which is the cumulative exit scale data accumulated over the past 20 years. “

In other words, the cumulative exit rate of VC/PE investments in China over the past 20 years is 36%. Estimated at this speed, funds with a scale of several trillion yuan have essentially become “zombie funds” and it is difficult to exit through normal channels.

On the whole, “zombie funds” basically meet the following characteristics: 1. The fund’s book losses cannot bring returns to LPs, and there is little hope of exiting; 2. The fund cannot make large investments and cannot raise new funds; 3. GP management The loss of the team is serious, and some even have only one or two people struggling to support them.

In short, most of the “zombie funds” have no returns, no new funds, no new investments, and are almost “dormant” shutdowns.

A U.S. dollar institutional investor in the Beijing area said that the reason for the emergence of “zombie funds” is related to the development of the economic cycle. In the past economic cycle, LPs at home and abroad had a large number of configurable assets. Institutions do allocation, and will also disperse funds to some small funds, because this type of institution has its own unique advantages in discovering some underwater projects, or form ultra-early investment in a certain subdivided investment field, and then introduce large capital , Transfer or IPO exit closed loop, which is the so-called vertically focused “small and beautiful” fund operation mode in the industry. From the perspective of return rate, DPI and IRR are relatively high, and will be favored by LPs. When the general environment is good, regardless of the size of the fund, it can be covered by rain and dew. However, under the current domestic and foreign economic, geopolitical and other factors, once the people who pay money are tightened, the liquidity of small and medium-sized funds will naturally be affected, and the ability to resist risks will deteriorate.

Regarding the status of a large number of VC/PE institutions becoming “zombies”, Chen Ke, general manager of Boxin Fund, said bluntly, “These zombie institutions are the product of the rapid development of the primary market since 2014, and they should not have received financing before.” In his opinion Come on, no matter in terms of talent reserves or investment capabilities, these institutions are not qualified at all, and the cold winter has only revealed their true appearance.

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Xiong Gang also expects that there will be more and more “zombie funds” in the industry – most institutions are dead because they have to manage existing funds, but in fact they can’t raise money. “At present, many fund investment projects are still in a state of being unexited and no one is taking over. This fig leaf is quickly stripped away, which makes people feel very useless, or they will be liquidated and declared all losses, and they will die tragically. How many social resources have been occupied by them. “

How should small and medium VC respond?

In 2022, the polarization trend of fundraising in the domestic primary market will still be obvious. Funds will continue to flow to leading institutions, and it will become more difficult for small and medium-sized funds to get money. The 19th effect is obvious.

Zero2IPO Research Center analyzed the data of the equity investment market in the past five years and found that the proportion of small-scale funds with a fundraising scale of less than 100 million yuan has increased since 2018, but the total scale has always been less than 10%. As far as 2022 is concerned, China’s equity investment market disclosed that the fundraising amount was 2,158.255 billion yuan, a year-on-year decrease of 2.3%; the average fundraising scale of a single fund was 306 million yuan, continuing the downward trend.

Some start-up CVC institutions admitted frankly that they adjusted their fund strategies last year in response to the current environment. Since last year, they have raised 100 million to 200 million funds every year, and basically completed their investment in that year. I am more satisfied. The new year’s fundraising can also have a certain foundation, and it is enough to supplement incremental funds appropriately, forcing myself to be more professional in investment and to be able to see the industry accurately.

Yuan Hongwei, the founder of Zhuoyuan Capital, also told reporters that the current investment strategy is to raise funds while investing, not blindly pursuing large funds that raise 500 million or 1 billion, and when tens of millions of funds come in and see good projects Invest first to discover start-up technical teams at an earlier stage. “The market environment this year is still not very good. In many regions of China, it is difficult for small funds to meet the support policies for venture capital. We also plan to launch a new fund in Suzhou. In a market-oriented and professional area, we will invest in early-stage VCs. Funds are more helpful,” she said.

Guo Libo believes that the stock optimization pace of the entire domestic venture capital and private equity industry is accelerating, and the threshold is getting higher and higher. Clearing stock will become the main theme of industry development in the future. At present, there are 13,000 institutions registered with the China Foundation Association, and this year it may drop to less than 10,000. A large number of zombie institutions can neither raise a new fund nor invest in new projects. Some institutions may transform into the role of FA .

Massive information, accurate interpretation, all in the Sina Finance APP

Responsible editor: Wu Jian

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