The findings of this report have big wealth-creation implications for advisors looking for the next generation of high net worth clients in Asia, and in other parts of the world.

China’s venture capital sector is not in the slipstream of the US any longer because new figures show that Chinese start-ups are attracting more funds than their US peers. The change underscores how the economic centre of gravity is moving to the East.

In the first six months of this year, $56 billion was invested China-based early-stage firms, leaving the US in second place, at $42 billion. The data comes from Preqin, the research firm tracking venture capital, private equity, hedge funds, and the European business school INSEAD. 

The US is still home to the greatest number of venture capital unicorns – defined as privately held, venture capital-backed companies with valuations of $1 billion or more. The US is home to 162 unicorns out of the 321 that exist globally. But five of the 10 largest such entities are in China, including Ant Financial Services Group, valued at about $150 billion. China-based firms also account for three of the largest initial public offerings of venture capital unicorns including, the largest of all, the Alibaba Group. That firm had a value of $231 billion when it floated on the New York Stock Exchange in 2014. Perhaps, fittingly, the authors of the report call the latest developments The Year Of The Red Unicorns.

“China’s emergence as a hub of innovation and entrepreneurship has been the major venture capital narrative of the past five years. Conditions in the country are well suited to promote large technology firms – China boasts more mobile phone users than any other country, and technology like e-commerce and mobile payments are deeply embedded in the lives of many people,” Christopher Elvin, head of private equity at Preqin, said. 

Growth pace has been rapid: In 2010 China-based early-stage companies secured just $4.6 billion in venture capital funding – in 2017 they secured $64 billion. Of the 321 venture capital-backed unicorns currently active worldwide, 98 are based in China, while 162 are based in the US.

Coupled with recent data from UBS and PricewaterhouseCoopers that China is the strongest driver globally for new billionaires, this bolsters the idea that China is the best place for wealth managers to find new clients.

(Data from Preqin.)

As of July 2018, the largest unicorns globally are: Ant Financial; Uber Technologies; Didi Chuxing; Airbnb; Tongcheng Network Technology Co; WeWork Companies; Palentir Technologies; Toutiao; Shanghai Lujiazui International Financial Asset Exchange, and Pinterest.

The Preqin/INSEAD report’s authors throw in a few words of caution, however: “For example, China has difficulty conquering the global labour market compared to the US. Whereas Silicon Valley attracts top talent from around the world, China is not quite on the list of preferred start-up locations. Stumbling blocks include the language barrier and cultural differences. Additionally, despite new policies having been implemented to protect patents and endorse intellectual property rights, China is still criticised for – and some may argue being held back by – a lack of strong intellectual property and trademark laws.”

The report also noted that a high number of VC investors in Chinese firms operate in the country. Of the 465 investors globally that invested in the 98 Chinese unicorns that form Preqin’s dataset, 66 per cent have a local presence in mainland China and a further 9 per cent in Hong Kong. Only 13 per cent of investors are investing directly from the US, and barely any are located in Europe.

The report also names the top-10 investors in China when ranked by the number of unicorn holdings: Sequoia Capital (8); Morningside Venture Capital (7); Matrix Partners (7); ZhenFund (6); IDG Capital (5); Qiming venture Partners (4); CDH Investments (4); Shunwei Capital Partners (4); Lightspeed Venture Partners (4), and GGV Capital (3).

(Editor’s note: This certainly shows that China’s start-up sector is in rude health and is clearly positive news for wealth managers in the region. Given the country’s rapid growth – in spite of all the headwinds from tariffs and other factors – it is not surprising that it is matching and even overtaking the US. That said, it is notable, and sobering, that very few European VC funds appear to be involved in this story. And the figures also reinforce some worries that the great motor of American capitalism is misfiring. A recently-published book, Capitalism in America: A History, by former US Federal Reserve Chairman Alan Greenspan and journalist Adrian Wooldridge, lays out some of the problems. For example, new business formation rates are, the book says, as low as they have been for more than two decades, and labour mobility and productivity has been waning. These numbers might not immediately set off alarm bells for wealth managers, but in the long run a healthy wealth management sector requires a vibrant economy. And it may well be that the sort of data Preqin and INSEAD show highlights a deeper, and potentially concerning, trend. Needless to say, there appears to be little visible discussion of this in Washington DC or the capitals of Europe.)