PE Firms Pivot To Less Scrutiny-Prone Industries In China 

Semiconductors, automation, and renewable energy are just some of the industries private equity (PE) firms are looking into as the clampdown on web-based, customer-facing startups continues in China.

The continuing crackdown by China into data-heavy tech platforms is causing PE and Venture Capital (VC) companies to redirect their strategies from those industries that are subject to intense scrutiny and sudden changes in regulations, Reuters reported on Monday (Aug. 9).

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“China’s demand for homemade chips and the trend of electrifying vehicles and autonomous driving will also create many new companies with investment potential,” Henry Zhang, president of Hong Kong-based Hermitage Capital, told Reuters.

The strategy change was prompted by an unexpected wave of crackdowns by various Chinese agencies that triggered new laws, big fines, and a lot of uncertainty and fear. It started with China’s halting of Ant Group’s IPO, and as of late, affected private tutoring companies.

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“We are faced with the most stern regulatory environment in over a decade, when market competition is the fiercest and capital the most abundant,” said Richard Ji, chief investment officer and managing partner of All-Stars Investment, per Reuters.

VC, PE, and angel investors were all caught off guard by the crackdown, and some are now examining China’s policy for an industry when evaluating risks for investments there, per Reuters.

“The Governance of China” — a series of books by Chinese President Xi Jinping — is on the reading list of some investors, and they try to forecast what direction policy might be headed. Other investors are signing up for state-owned media sites, per Reuters.

See more: Big Tech’s Big China Trouble Makes Investors See Red

“We have to keep ahead of what the country is thinking,” said Choon Chong Tay, managing partner and head of Vertex Ventures China, a VC firm backed by Singaporean state investor Temasek.