PRIVATE equity (PE) firms are rethinking their strategies in China as a widening regulatory move on some of the country’s hottest sectors forces investors to scout for bets in other industries that they hope will be less vulnerable to policy changes.

Private equity and venture capital (VC) funds are pivoting away from data-heavy, consumer-facing Internet companies to sectors including semiconductors and renewable energy, industry executives said.

The shift comes as investors reel from a barrage of regulatory moves and rule changes in the last few months targeting big domestic companies, mainly from the Internet, private education and property sectors.

The move to ban private tutoring firms last month from making a profit from teaching core school subjects and raising capital, for example, is set to trigger a scramble among private equity investors to find an exit after pouring in billions.

The regulatory moves will not only cast a shadow over PE investors’ return prospects, but will also narrow investment opportunities at a time when many of them are sitting on billions of dollars worth of capital.

Forty-three China-focused funds raised a total of US$49 billion this year, nearing 2020’s annual amount of US$50 billion, according to Preqin data. Hillhouse Capital Group alone raised US$18 billion in Asia’s biggest non-state-backed fund in May.

The number of funds raised this year, however, is less than a third of last year and a steep drop from the fundraising peak in 2016 and 2017 when over 1,100 funds were raised each year, the data showed.

According to Chinese data firm Zero2IPO, in 2020, angel, venture and PE-backed investments totaled 887 billion yuan (US$137 billion), up 14 percent year on year, of which 384.3 billion yuan went to IT, internet and semiconductor and electronics sectors.

In the first half of this year, investments totaled 470 billion yuan, up 50 percent year on year.

As a result of the recent regulatory moves, many investors are shifting focus to sectors that are less prone to antitrust and data-related scrutiny such as semiconductors, automation, renewable energy, health care and business-focused tech services.

Those sectors are also seen by some executives to be in line with China’s strategic goals, as, investors say, the government remakes certain sectors to curb cost pressures and better serve ordinary people. (SD-Agencies)