Saudi Foreign Minister Faisal bin Farhan al-Saud (CR) and Chinese People’s Political Consultative Conference (CPPCC) Vice Chairman Chu Chunhua attend the 10th Arab-Chinese Business Conference in Riyadh, June 11, 2023.
Fayez Nureldine | Afp | Getty Images
BEIJING — Venture capitalists in China, once reliant on American investors, are now holding court with money from the Middle East.
A flurry of conferences and business visits between China and the Middle East in the past few months represents what is expected to be an increasing trend in international capital flows.
Many Middle Eastern investors have discussed deals with Chinese venture capital funds in the past 12 months, according to sources at three Chinese firms with US dollar-denominated funds. They requested anonymity because they are not authorized to speak publicly about fundraising conversations.
Although this money does not completely replace US investment, it is expected to account for about 20% of all US dollar funding by Chinese VCs, one estimated source.
Middle Eastern investors are actively looking for opportunities in China and then making small-scale investments to test the waters, a source told CNBC this week, noting that frontier technology, new consumer trends and biotech are popular sectors of interest.
The strengthening of the investment trend is a concurrence of diplomatic, financial and economic developments.
China’s ties with the Middle East have warmed after Saudi Arabia and Iran restored diplomatic ties earlier this year – through discussions brokered by Beijing.
Meanwhile, tensions between the US and China have eased.
These tensions and increased regulatory oversight in both countries have prompted many US investors to hold off on investing in Chinese venture capital funds. These funds were usually denominated in US dollars and the invested startups would then go on to list on US stock exchanges.
Middle East capital is scrambling to step in, especially as countries like Saudi Arabia and Qatar seek to diversify away from fossil fuel dependence.
However, many potential investments in Chinese funds are still under discussion, venture capital funds said.
As of February 2022, Middle Eastern investors’ allocation to North American assets was still significantly higher than Asia-Pacific, according to alternative asset research firm Preqin. Alternative assets include venture capital, but not publicly traded stocks and bonds.
This exposure is growing.
Preqin data showed that the share of Middle Eastern sovereign wealth funds investing in alternative assets globally roughly doubled between 2021 and the first half of 2022.
Together, the eight largest Middle Eastern sovereign wealth funds had total assets of more than $3 trillion as of last year, according to the latest estimates available from Preqin.
Saudi Arabia’s ties with China are shifting from trade relations to “basic investment relationshipKhalid Al-Falih, the Saudi investment minister, told CNBC’s Dan Murphy this week.
In addition to Saudi investments in oil refining and petrochemicals in China, Al-Falih has seen investments in technology by Britain’s sovereign wealth fund, a public investment fund and private sector companies.
The PIF has roughly $700 billion in assets under management, according to its website. The fund did not respond to a request for comment on the proportion of its Chinese investments.
“It was very clear that trucking in China is bigger than anywhere else. If a company is successful in creating safe, autonomous trucking, the chances of it expanding in China are higher than elsewhere,” said Aysar Tayeb, CEO company Prosperita7.
Prosperity7’s investments in about 30 startups are split roughly evenly between U.S. and Chinese companies, Tayeb said in a phone interview earlier this month.
“We’re definitely starting to see more activity in China,” he said, noting that Chinese deal flow “has been a little slower in the last two years” due to the Covid-19 pandemic.
In May, Abu Dhabi hosted conferences focused specifically on Chinese businessmen.
In May, local authorities said they hosted China’s “top 50 unicorns” – a term referring to startups valued at more than $1 billion – and launched “Arab China Unicorn Investment Conclave,” according to a statement by the United Arab Emirates state media.
“After the conference, it will increase the participation of investors from China,” said Massimo Falcioni, secretary general and vice president of the Dubai Business Council. He said more investment funds and asset management companies are coming to the UAE from China.
“China is a major source of technology, a major source of business,” he said. “Partnership with China is one of the key drivers for realizing the successful transformation of the UAE.”
Chinese companies have valuable infrastructure and manufacturing know-how, said Niol Ma, a Chinese native who says he has lived in Dubai for about 20 years.
Regional interest in doing business with China has grown so quickly that Ma says his firm, Gulf Ferry Management Consultancies, has gone from zero clients in 2021 to meeting more than 100 prospects in the past 12 months. Ma says his firm has already helped these Chinese clients raise more than $350 million.
For a number of Chinese clients, he said, the goal is for them to transform into local companies in the Arab region that will eventually be able to list on the Nasdaq.
— CNBC’s Natasha Turak contributed to this report.