Tencent Pursues Quieter Investment Strategy Amid China’s Big Tech Crackdown

Nearly five years ago, Pony Ma, CEO of Tencent, boasted to other Chinese business leaders that his company was so vital that it was becoming “more and more a supplier of water or ‘energy, as an infrastructure’.

Its control of the ubiquitous WeChat super app, a faucet controlling the flow of a billion users, has also made Tencent a valuable backer for many start-ups, helping the tech company build a listed investment portfolio of worth Rmb 1.2 billion ($190 billion) as of September 30. He also holds stakes worth tens of billions of additional dollars in private companies, according to a person close to the company’s executives.

But the Chinese Communist Party’s campaign to rein in rival giants such as Alibaba and Meituan has prompted a radical rethink of Tencent’s strategy of spreading tentacles across the country’s tech scene, according to company insiders, senior executives industry and investment data analysis.

As Beijing reassesses the influence of private companies on the economy and society at large, Ma appears to be pursuing a more low-key approach to investing in his country, with an emphasis on overseas expansion.

“We’re not a basic service type,” Ma said at Tencent’s recent year-end party in December, telling employees they worked at “just an ordinary company,” which was “a good assistant” but “easily replaced”.

Over the past year, Chinese antitrust authorities have held talks with Ma, fined Tencent for nearly three dozen of its past investments, blocked a merger and demanded the company open up its ecosystem to competitors.

Along with new rules subjecting Tencent’s investments to greater regulatory scrutiny, the company also recently disposed of $16 billion to Chinese e-commerce giant JD.com. Additionally, he indicated that he may continue to sell stakes as his portfolio companies mature.

“In the future, we expect [Tencent] invest less in platform companies so as not to have the impression of forming [alliances] through investments, which is seen as problematic under China’s anti-monopoly orientation,” said Bo Pei of US Tiger Securities.

Data shows Tencent’s investments in 2021 hit a record high of 270 from 174 the previous year, but there are signs that its spending is starting to slow. The company’s transactions in China in the fourth quarter were only a third of the number in the first quarter, according to data from research group ITjuzi.

“As the portfolio gets bigger and bigger, it’s natural for returns to deteriorate,” said a person briefed on the company’s investment strategy. “So rather than being empire builders and having bigger and bigger portfolios with bigger and bigger returns, [Tencent] would rather just give some of the value back to shareholders.

Part of the slowdown can be attributed to Tencent’s increased desire to stay out of the spotlight. Several venture capitalists told the Financial Times that Tencent had recently asked not to mention its name in press releases issued by start-ups touting new funding rounds, highlighting recent fundraising rounds for the Lanhu product design tool and XSKY enterprise software provider.

Charlie Chai, analyst at 86Research, said that despite JD.com’s sale, the company remained in the crosshairs of the authorities. He pointed to Tencent’s stakes in food delivery app Meituan, e-commerce giant Pinduoduo and online brokerage Futu as groups considered “reasonably similar to JD”, adding, “In the eyes of the regulator, they share traffic and try to dominate by sharing users, it is impossible for a new entrant to break in.

There is growing sensitivity to Beijing’s demands after regulators recently scuttled Tencent’s plan to merge two video game streaming sites and fined the company and its affiliates Rmb 16 million for failing to to report nearly three dozen past investments, or the maximum fine of Rmb 500,000 for each case. Late last year, Tencent received four separate fines for transactions where it only acquired a minimum 10% stake in start-ups.

The fines come after Chinese authorities closed a loophole in November 2020 that allowed internet giants to embark on a year-long spending spree without needing approval from the anti-monopoly regulator. Tencent now has to go through the cumbersome merger approval process in China when investing in big start-ups if it gains any modicum of control in the process.

The new rules mean Tencent has had to reduce the level of influence it can ask for when investing in start-ups to avoid problems, according to two people familiar with its trading strategy.

“The size of the stake does not matter. The premise is that if you can influence the target’s key business decisions, you’re in control,” said Scott Yu, a lawyer who has trained Chinese tech giants on antitrust compliance.

“In the past, large tech companies could apply for a seat on the board and require unanimous board approval for key issues such as investment plans, annual budgets or the appointment of new executives. , but now that might change.”

Yu noted that target start-ups must also have Rmb 400 million in annual sales in China to meet the filing threshold. Data from ITjuzi shows that Tencent increased its proportion of seed investment last year compared to the previous year.

In an official statement, Tencent denied that there had been any change in its investment strategy, simply saying that its goal was to invest in early stage companies. “Tencent regularly reviews its investment portfolio and considers various options that benefit it and its beneficiaries,” he added.

Billion dollar bar chart showing Tencent's most valuable holdings in Asian tech

While navigating a murky regulatory landscape at home, Tencent is expanding overseas, with 44 deals completed last year, up from 17 the year before, in sectors including gaming, e-commerce, health and fintech.

Tencent is aggressively recruiting in Singapore to ride the Southeast Asian tech wave. Its largest shareholder, Prosus, just raised $5.25 billion in new debt last week for purposes “including acquisitions and investments”, according to a statement from the company and documents seen by the FT. In recent weeks, Tencent has increased its stake in Finnish mobile game company Supercell and invested in Monzo, the UK online bank.

“Regulators have made it very clear that they don’t want to see anti-competitive behavior. . .[like]engulfing all gaming companies,” said Wong Kok Hoi, Chief Investment Officer at APS Asset Management. “Now they have no choice but to internationalize.”

But being a Chinese company could hamper its international campaign. In recent years, India has blocked WeChat and Tencent’s other successful apps and games in the country.

This year, Tencent abruptly announced plans to sell a small amount of shares and give up voting rights in Sea Ltd after its stake in the company began to spark controversy in India.

Sea’s online marketplace Shopee was just beginning to catch on in the country when a vocal nationalist trade association and Prashant Umrao, a lawyer aligned with India’s ruling Bharatiya Janata party, accused the company of being an agent of the Chinese technology company. The plan will reduce Tencent’s voting power at Sea from around 23% to less than 10% and voids a voting agreement Tencent had with Sea’s founder.

Whatever the next target for the Beijing crackdown, where Tencent invests, is no longer a private matter, with a person close to the company saying it now considers the public appearance of any investment alongside its regulatory impact.

“The market regulator knows intimately how many investments each of these tech giants has made,” said a senior Chinese venture capitalist. “A manager gave me the figures for each company. They watch closely.

Additional reporting by Nian Liu, Emma Zhou and Robert Smith

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