Early Xiaomi Backer to Surpass Funding Goal in Major China Test

Zheping Huang and Cathy Chan, Bloomberg News

An electronic ticker displays stock figures in Pudong's Lujiazui Financial District in Shanghai, China, on Monday, Sept. 18, 2023. China's economy picked up steam in August as a summer travel boom and a heftier stimulus push boosted consumer spending and factory output, adding to nascent signs of stabilization. Photographer: Raul Ariano/Bloomberg , Bloomberg

(Bloomberg) -- China’s 5Y Capital is on track to surpass its target of raising $700 million for a closely watched venture fund, in a sign that investors are regaining confidence in the world’s biggest internet arena.

The oversubscribed US-dollar fund has a hard cap of $800 million and is set to close early next year, according to people familiar with the matter, who asked not to be named discussing private information. Known for early bets on Chinese tech leaders like Xiaomi Corp. and Kuaishou Technology, Shanghai-based 5Y had previously put off a plan for another growth fund targeting later-stage startups, one of the people added.

A 5Y spokesperson did not respond to a request for comment.

The firm’s fundraising has been closely monitored by the investment community as a litmus test of confidence in China’s private sector. Its successful closing is likely to be hailed as a win for China’s embattled startup scene. The country’s severe Covid lockdowns, along with a regulatory crackdown on the tech sector, hurt confidence — while a trade war with Washington has made it a less appealing destination for international finance.

China has seen about $44 billion in venture deals so far this year, according to PitchBook data, down 65% from the full year in 2018. Deals involving US-based venture firms fell 95% in that period to just $2.2 billion.

The Biden administration has imposed limits on US investments in some Chinese semiconductor, quantum computing and artificial intelligence firms, pushing local startups and venture investors to look for alternative funding sources like the Middle East. Given the difficulty, venture powerhouses including Sequoia and GGV have split their Chinese and US operations to operate independently from each other.

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Last year, Sequoia China, now known as HongShan, raised $9 billion across four new funds, and Qiming Venture Partners, another leading Chinese venture firm, secured about $3.2 billion for investments in tech and health-care firms. But the deal flow has noticeably slowed down this year, after investors became wary about China’s post-Covid growth trajectory and mounting tensions between the world’s two superpowers.

Formerly known as Morningside Venture Capital, 5Y Capital was a spinoff from Hong Kong property mogul Ronnie Chan’s Morningside Group. The fund renamed itself in 2020 after Shanghai’s Wu Yuan Road where it started operations more than a decade ago. It has backed companies including Xiaomi, Agora Inc., SenseTime Group Inc., and automaker XPeng Inc. One of its most successful bets is an early investment in TikTok’s Chinese rival Kuaishou, in which it still holds a 16% stake.

In 2021, 5Y Capital raised $1.7 billion for two US-dollar funds, and it managed around $5 billion in total assets, the company said in a press release at the time.

--With assistance from Jane Zhang.