Preqin: 2017 Set to be Record Year for Venture Capital in Asia

North America still dominates, with 61% of investors saying it currently presents best opportunities.

This year could establish a record for venture capital fundraising focused on Asian deals. North America remains the preferred location for deals, as Silicon Valley continues to be the home for many general partners who drive deal flow.

Since the start of 2014, more than $43 billion in VC funding has been raised and this amount is expected to hit $55 billion globally in 2017, according to a new report by Prequin, an expert in information for the alternative assets industry.

The new report, “Private Equity and Venture Capital Spotlight,” found that Asia-focused venture capital fundraising peaked at $14.5 billion, before declining slightly as funds raised $14.1 billion in 2015, and $13.3 billion in 2016. In total, 333 funds have raised $43.3 billion in Asia since the start of 2014, the study said. Still, VC activity in North America is leading the world in 2016.

Felice Egidio, Preqin’s Head of Venture Capital Products, said “the development of the venture capital industry in Asia has undoubtedly been one of the major success stories of recent years. Robust fundraising and healthy deal flow have established the region as a key player in the global industry, and with domestic and international investors increasingly targeting Asia-based start-ups, it is of little surprise that fundraising looks set to accelerate in 2017.”

As expected, China is playing a key role in the growth of the Asian market. In particular, the Chinese government is encouraging entrepreneurship by providing support and financing for start-ups alongside private firms. “However, venture capital fund managers across Asia will have to prove that they can provide the strong returns that investors demand in order to ensure that the current boom in fundraising can translate into a long-term ascendancy,” Egidio said.

Optimism for the new VC activity globally is being fueled by the following, according to the report:

  • About 40% of institutional investors questioned said they were committing more capital this year than last. The reason: 95% of investors said their private equity fund investments met or exceeded expectations in 2016, including 24% for which they had exceeded expectations.
  • Looking ahead, investors are even more positive about the potential of this asset class. About 40% said their private equity investments had exceeded expectations over the past three years, second only to private real estate (42%). Yet the good performance may not last forever, so investor confidence in the ability of private equity to achieve portfolio objectives fell over the past year, possibly due to concerns about whether fund managers can continue to deliver strong returns during a time of high valuations. Still, 86% of fund managers said they were confident private equity managers could reach or exceed portfolio objectives.
  • In 2016, 382 funds reached a final close, securing $55 billion. While this capital is on par with the previous record in 2015 (from 442 funds), as more information becomes available, the 2016 figure is likely to surpass 2015. Consequently, average fund size reached a record high of $166 million in 2016, an increase of 16% from 2015.
  • The year 2016 marked the third consecutive year that VC fundraising surpassed $50 billion worldwide. Even though fewer funds closed globally, the average size reached a record $166 million.

North America Remains the VC Epicenter

While Asia captured the attention in terms of its rapid growth, the preferred initial destination for VC still is North America. The study found that investors consider North America the most promising region for private equity investment, with 61% of investors saying it presents “the best opportunities at present, followed by Europe (44%). In terms of allocations, however, a greater proportion of LPs plan to increase their allocation to Europe (31%) than North America (25%) over the coming year, with 4% and 7% planning to reduce their allocations to these regions respectively.

Outside the established private equity markets of North America and Europe, 21% of investors saw Asia as among the most favorable regions for private equity investment and 18% of investors plan to increase their allocation to the region over the coming year, compared with only 5% that plan to decrease it.

More specifically, North America listed 222 funds that closed last year raising an aggregate $34 billion, while California-based general partners managed $21 billion, or 61%, of all North America-focused venture capital raised.

The next largest geographic VC site was Europe, where 53 Europe-focused funds raised a combined $6.1 billion in 2016, followed by Asia, where 80 Asia-focused funds raised $13 billion, with China-focused funds accounting for 64% (or $8.4 billion). Preqin said the remaining VC activity was focused on 27 funds that raised $1.8 billion for investment outside North

America, Europe and Asia in 2016. This sector was led by Israel- and Australia-focused venture capital. In 2016, there were eight Israel-focused vehicles that raised $800 million, while six Australia-focused funds raised $500 million.

By Chuck Epstein