ChatGPT spurs interest of pensions and institutional investors in Chinese AI firms

ChatGPT has brought artificial intelligence to the forefront of institutional investors’ minds and Chinese AI companies are benefiting from that interest — even if limited partners and venture capital firms are keeping silent on the topic.

A February report by the Center for Security and Emerging Technology, a research organization within Georgetown University in Washington, said that Chinese AI firms raised $110 billion between 2015 and 2021, of which $40.2 billion came from syndication deals in which U.S. investors participated. The report did not detail how much of the $40.2 billion was allocated by U.S. institutional investors.

Since then, relations between China and the U.S. have worsened over several concerns, including data privacy and competition for technological supremacy. In October, the Biden administration banned the export of high-end AI chips to Chinese companies, leading to China accelerating its push into developing its own chips.

Venture capital players have pinpointed AI as a major trend for the future. There is increasing interest in generative AI, said Irene Chu, partner and head of new economy and life sciences of KPMG China in Hong Kong.

Globally, venture capital activity has fallen steadily over the past year, with deal value plunging 60.4% to $57.3 billion in the first quarter of the year from $144.8 billion a year earlier, according to the KPMG Venture Pulse Q1 2023 report released on May 2. U.S. deal value fell 55.2% to $31.7 billion, and Asia venture capital investments fell 58.6% to $13.5 billion.

VC investment in China fell to $7.4 billion —less than half of the $15.1 billion from a year ago. The report did not break out data specific to AI investments.

Industry players generally agree that in China, the companies with the most potential in the AI space are mostly larger firms because of the resources needed to run functional AI technologies — that means they tend to be growth or late-stage private firms, or large, listed technology companies like Baidu Inc. and Alibaba Group Holding Ltd.

“Generally at this moment, investors are still cautious given the slow exit activity in the IPO market,” Ms. Chu said. “Early stage startups or first time fundraisers will need to rely more on government funding.”

Still, prompted by the ChatGPT craze, new AI companies have sprung up in China. GuangNianZhiWai, a new Beijing-based AI firm set up to rival OpenAI, the research company behind ChatGPT, raised $230 million in seed funding during the first quarter, according to the KPMG report, making it among the top 10 financings in Asia-Pacific.

GuangNianZhiWai was set up by Wang Huiwen, a tech veteran who co-founded e-commerce platform Meituan, which now has a market cap of more than HK$800 billion ($102 billion) on the Hong Kong exchange.

Chinese venture capital firms have been uncharacteristically quiet about fundraising and capital deployment in recent months, and their U.S. investors even more so.

“Very few Western endowments or those types will admit that they invested in maybe like a SenseTime or something like that,” said a San Francisco-based venture capital expert, who asked not to be identified.

“First, I doubt that they invested in those companies directly. And then, two, I really think they would not admit it anyway, just because the sensitivities around surveillance and sort of all that stuff happening, et cetera. It’s much more sort of quieter,” he said.

SenseTime is an AI company founded by Chinese nationals Tang Xiao’ou and Xu Li in Hong Kong. At one point, SenseTime was the world’s most valuable AI company; its 2021 debut on the Hong Kong stock exchange valued the company at $16.4 billion. OpenAI has surpassed that significantly, with a valuation of $27 billion to $29 billion in its latest $300 million funding round in April.

U.S. investors have made commitments to Chinese private equity and venture capital investments through firms such as Sequoia Capital China. They include the University of California Board of Regents, Oakland, the University of Texas Investment Management Co., Austin, and the Alaska Permanent Fund Corp., Juneau, according to Bloomberg data.

UC Regents committed $131 million to Sequoia China Venture VIII and Growth VI, run by Sequoia Capital China, while the University of Texas Investment Management had $64.5 million committed to the same two funds.

Alaska Permanent in 2020 committed $42 million to Sequoia China Venture VIII and Growth VI, according to P&I data.

The VC funds have invested in Chinese companies that develop or use AI technologies. For instance, Sequoia Capital China Growth Fund VI has invested in artificial intelligence gaming firm Chaocanshu Technology, having led a $100 million series B funding round in early 2022, while Sequoia Capital China Venture Fund VIII earlier this year invested in SiEngine technology, an automotive chipmaker that developed a smart cockpit system-on-chip with embedded AI for driver assistance systems, according to Bloomberg data.

UC Regents declined to comment, while the University of Texas Investment Management and Alaska Permanent did not respond to a request for comment.

In addition, the Texas County & District Retirement System, Austin, and the San Francisco City & County Employees’ Retirement System had committed $85 million and $100 million, respectively to Hong Kong-based private equity firm Hillhouse Capital Group’s Hillhouse Fund IV, which closed in 2018 at $10.6 billion. The University of Texas Investment Management also committed $35 million to Hillhouse Fund IV, according to Bloomberg data.

Hillhouse Fund IV was created to seek buyout opportunities and minority stakes in Chinese companies across sectors including consumer, technology, media and health care.

According to Bloomberg data, Hillhouse Fund IV in 2019 invested in Agile Robots, an AI- and robotics-focused software platform company headquartered in Munich and Beijing; Yuanian Technology, which developed an AI-powered business analytics platform that supports decision-making; and Shanghai-based Allsense Technology, which provides intelligent cloud services for thermal power companies.

TCDRS and SFERS did not respond to requests for comment. Hillhouse and Sequoia China did not respond to requests for an interview.

The launch of ChatGPT is credited with spurring institutional interest in AI firms in China and Hong Kong, sources said.

“We have definitely noticed an increase in AI startups in China as well as an increase in investors wanting to get into this space. … The increase in interest stems from the fact that the need is increasing not just from an investment standpoint but from everyday use cases and consumer need to make our personal and professional lives more efficient,” said Jennifer Cheng Lo, Hong Kong-based founder and chairwoman of single family office NewChic Capital, which has invested in AI companies as a limited partner.

Industry insiders also said that Chinese firms have been in the AI game for decades and have strengths in areas separate from ChatGPT-type models. Between 2012 and 2021, China outstripped the U.S. in the number of research papers published on AI, according to a study by newspaper giant Nikkei Asia in partnership with Elsevier, a Dutch scientific publishing company.

“Chinese companies tend to be stronger in application-specific types of AI that don’t require the generative AI framework (used by models such as ChatGPT),” said Tiffany Hsiao, the San Francisco-based founding portfolio manager and lead portfolio manager of the Artisan China Post-Venture strategy. The strategy is run by investment management firm Artisan Partners, which had $138.5 billion in AUM as of April 30.

“If we look back to 2019, Chinese companies put less emphasis on generative AI because it was expensive to train and was not yet proven at the time. Today, many companies have responded to China’s economic reopening with a renewed spirit of enthusiasm and competition, so we expect that China can innovate quickly,” she said.

Some other areas within AI in which China has made inroads include machine vision and autonomous driving, Ms. Hsiao said.

“Machine vision could include technologies used to automate manufacturing processes, as well as those used in speech and facial recognition tools or autonomous driving components,” she said.

Autonomous driving technologies will make a positive impact on productivity through long-distance commercial hauling and ensuring safer driving standards particularly as China’s population ages, she added.

Health care is another area that has spurred investor interest, sources said. “Companies in China use AI to predict drug properties, screen large databases of compounds and identify new use cases, improve the efficacy and safety of drugs, and optimize drug formulas for stability and other desirable properties,” Ms. Hsiao said.

“Companies are also using AI to study genomics, finding new targets in human genomics and identifying flaws in the human genome to solve for mysteries of certain genetic diseases. Within health-care procedures, robots are even starting to handle functions such as acupuncture, with more precision than human hands,” she added.

Source: Pionline