In the past two years, the notion that "the US dollar fund is dead" has been echoing. Influenced by geopolitical tensions, macroeconomic factors, high overseas interest rates, and exit uncertainties, the number of venture capital deals by US dollar investors in China reached a four-year low in 2023.

However, First Financial Daily reporters have learned that recently, LongRiver Investment has defied the trend by raising nearly $400 million and has recently reached its final closing, making it one of the largest first-time US dollar funds in recent years. The fund's investors are all long-term institutions, attracting capital from numerous overseas insurance companies and asset management firms. The fund has a term of 10 years plus 2 years, with a focus on medical and technology sectors. This is quite rare in the current market conditions. How will US dollar funds develop in adversity in the future? What kind of Chinese assets can still attract international long-term investors? What is the outlook for exit channels such as China's A-shares, Hong Kong stocks, and US stocks?

Recently, Zhang Jiang, the founder and CEO of LongRiver Investment, said in an interview with First Financial Daily that the investment targets of US dollar funds are focused on the medical, technology, and new energy sectors, with "unique, first" being the core criteria for target selection. Despite the troubles of trillion-yuan venture capital funds in China facing exits, and the decline in the number of Hong Kong and US IPOs due to cross-border listing filing systems and other factors, Zhang believes that due to the fund's term of over 10 years, there is a greater opportunity to choose the right time to exit. He also believes that overseas listings remain an important exit channel and the door is still open.

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Fang Xinghai, the vice chairman of the China Securities Regulatory Commission, said during the Lujiazui Forum that since the implementation of the relevant institutional rules for the filing management of overseas listings on March 31 last year, as of June 18, a total of 158 companies have filed for overseas listings, with 85 going to Hong Kong and 73 to the United States. The future approval pace is expected to accelerate.

"Breaking the ice" of US dollar funds

In the past two years, the global PE/VC industry has faced challenges from the macro environment and uncertainties. It is not only the sharp decline of US dollar funds in the Chinese market, but also the relatively flat situation in the primary market globally.

It is in this environment that the final closing of LongRiver Investment's US dollar fund has attracted attention. It is understood that Zhang Jiang has raised and managed multiple RMB and US dollar funds at large insurance groups, and is also a member of the first and second Science and Technology Innovation Board Consultative Committee, leading the completion of more than 50 investments covering domestic, US, and Israeli medical and technology companies. These include projects from the very early stages of incubation to completion of listing, such as Smart Cloud Health (9955.HK); opportunities for mature companies, such as Taibang Biological (CTBB), WuXi AppTec (603259.SH/2359.HK), etc.; and overseas investment projects, such as Ironsource, Payoneer, etc. The main projects invested by the team are listed on the exchanges in Shanghai/Shenzhen/Hong Kong/US.

Despite the decline in US capital, some overseas institutional LPs from Singapore, Europe, and other places still focus on the opportunities in the Chinese market, with the key still being the vast scale of the Chinese market, and the increasing competitiveness of manufacturing and technological innovation strength.

Zhang Jiang believes that investors are still focusing on innovative companies with global competitiveness, with the goal of finding the next generation of industry leaders. Looking back ten years ago, CATL, TikTok, and Pinduoduo were just emerging new enterprises, but now they have all become the absolute leaders in their respective industries.

"Our responsibility is to discover and invest in such enterprises today, and accompany and support them to become the innovation leaders of the next decade." It is understood that the institution's RMB fund is also in preparation, and in the future, it hopes to support the next generation of industry leaders by integrating international and domestic resources.One of the industries that Zhang Jiang is most concerned about is medical technology. Due to factors such as the intensification of aging, breakthroughs in segmented fields, and the advancement of technological innovation, the medical and health sector, as a strong growth and weak cycle industry, is still worth a long-term optimistic outlook.

"Because this industry is so large, we will filter out about 15% of the key segmented fields for investment every year. These segmented fields cover 30 out of more than 200 sub-industries, including medical devices and biotechnology. We focus on investing in early-stage projects and work with leading enterprises to cultivate projects, while reserving 30% of the funds for follow-up investments in projects that have been invested in. For example, we have previously invested in a domestic pioneering modular surgical robot project for three consecutive rounds."

At the same time, there are investment opportunities in the fields of intelligence and automation, software and hardware technology, etc. China occupies nearly 80% of the global production capacity in the fields of photovoltaics and power batteries, and the new energy sector has attracted attention.

"We mainly focus on the upstream and segmented fields of the new energy ecosystem for explosive opportunities, mainly investing in the early stage. For example, we invested in a company that uses conductive powder materials for photovoltaics in the angel round, valuing the project's important role in reducing costs and increasing efficiency in the heterojunction technology route, and entering in advance."

Cross-border IPOs remain an important channel for exit.

Exit channels are still a focus of attention. In the past two years, dollar funds have faced two issues. On the one hand, under the background of geopolitics, some investment fields have disputes; on the other hand, the regulatory requirements for Chinese companies' cross-border IPOs have undergone significant adjustments in the past two years, and the prospects for cross-border listings of some companies have become less clear, which has also affected the exit plans of dollar funds.

Zhang Jiang told the reporter that mergers and acquisitions and domestic and foreign listings will still be the main exit channels in the future, and it is expected that the exit of the projects invested in by its dollar funds will be diversified in A-shares, Hong Kong stocks, and U.S. stocks.

A partner of a senior law firm mentioned to the reporter that in the early years, many Chinese projects invested in by dollar funds exited through cross-border listings (especially in the United States). However, the number of Chinese companies going public in the United States is continuously decreasing. With the establishment of the three major laws of the "Cybersecurity Law," "Data Security Law," and "Personal Information Protection Law," companies going overseas need to pay more attention to the compliance of data exports, and the difficulty for companies with more than 1 million personal information to go public in the United States has increased. At the same time, since March 31, 2023, the regulatory system rules for overseas listing filing management issued by the China Securities Regulatory Commission (including listing in Hong Kong) have been implemented, so the convenience advantage of going public in the United States has declined. In addition, the variable interest entity (VIE) structure commonly used by Chinese companies will also be a key review during the filing.

However, the positive trend is that since the fourth quarter of last year, the number of projects approved under the filing system has been increasing, including several enterprises with VIE structures. For example, Fang Xinghai recently mentioned that the exit of domestic PE and VC highly depends on IPOs. The tightening of IPOs in the domestic A-share market has made some institutions face exit difficulties. Since the implementation of the regulatory system rules for overseas listing filing management on March 31 last year, Chinese companies have been very active in going public overseas. As of June 18, a total of 158 companies have filed for overseas listing, of which 85 went to Hong Kong and 73 companies went to the United States.

"Regarding overseas listings, the attitude of the Securities Regulatory Commission is to accelerate the filing. Our current speed is a bit faster than before, but the overseas listing filing is still a new thing, and our speed is not fast enough, and we need to continue to speed up the filing speed. Because there are many companies in line, which is a good thing." Fang Xinghai said, "This indicates that a large number of companies are very active and very serious about their work, and they are definitely not lying flat. They all want to grow and become stronger, and we must strongly support such things."Exit Strategies Have a Method to Them

In Zhang Jiang's view, from the perspective of exit, the current investment strategies can be summarized as making three types of money: long-term money, stable money, and quick money.

Long-term money is invested in early-stage projects that have the potential to be disruptive or to become industry leaders in the future. Institutions focus on projects that are undervalued and have significant growth opportunities, holding them for the long term without rushing to exit. Stable money is invested in projects that have a positive cash flow or the potential to generate a stable cash flow in the future. These companies can generate returns through dividends or acquisitions even without relying on going public. Quick money, on the other hand, is invested in projects with a clear exit path, either through an initial public offering (IPO) or through being acquired, allowing institutions to quickly realize investment returns.

If we consider the "exit-oriented investment" perspective, Zhang Jiang believes that investing in "first" and "only" projects is crucial. "Compared to 'first,' 'only' companies have higher technical barriers, stable gross margins, and a greater likelihood of being acquired. Although 'first' has acquisition value, the valuation might be too high, and they might opt for an IPO themselves. 'Only' companies may not be large enough in their niche, but they often have very strong capabilities, making them highly valuable for acquisition by leading companies.

"Generally speaking, leading companies acquire 'only' companies either to enter that field or to ensure supply chain security. If the 'only' supplier is acquired by a competitor, the leading company's supply chain may be disrupted, so acquiring the 'only' supplier is crucial."

In response to the current industry situation where it is difficult for outstanding projects to exit, Zhang Jiang said, "Currently, many early-stage funds have the need to exit upon maturity. Our dollar fund has a term of 10 years plus 2 years and is willing to support outstanding companies by taking over old shares." The corresponding company profile mainly includes those with stable income and growth, reasonable valuation, and appropriate discount space. Companies at different stages from the growth phase to the listed company are included, and Jiang Yuan's team has named this "Star-Picking Plan," which can provide a relay for other early-stage technology funds and outstanding enterprise teams.