Tencent has stepped up its pursuit of Chinese Internet companies.
The Shenzhen-based internet giant and owner of popular messaging app WeChat has outlined an internal strategy to withdraw Rmb100bn ($14.5bn) from its $88bn equity portfolio, two people familiar with the matter said.
The soft target is part of a broader shift by Tencent to cut costs as economic growth slows amid China’s property crisis and zero-covid restrictions. The pivot represents a tidal shift in the Internet of Things and consumer sectors with cheap capital raised from deep-pocketed investors.
“Tencent is a powerful investment force. Their vast capital means they take risks that others cannot,” said Li Chengdong, head of Beijing-based internet think tank Haitun. “Tencent has given life to the entire venture capital community.”
The company has a larger war chest and longer investment horizon than most venture capitalists and is one of the key providers of a series of investment rounds, meaning changes in strategy have industry-wide implications.
Funding for startups has been reduced. Beijing-based data provider ITJuzzy reported that startup fundraising fell 38 percent in the first half of the year, while the number of deals fell 19 percent from a year earlier.
Lulu Yilun Chen, author Empire of Influence: The History of Tencent and China’s Tech Ambition“Tencent has funneled huge amounts of money into startups, creating a vibrant ecosystem where entrepreneurs can test business models and fight for market share.
“That era is gone after the deregulation and Tencent’s focus has changed with the broader economic slowdown,” Chen added.
Tencent’s move to scale back costs and move more units from its portfolio is representative of broader changes in the industry, Lee said. “This is a point of improvement for consumers and Internet companies,” he said.
Tencent’s investments in listed companies, excluding subsidiaries, reached Rmb602bn at the end of June, down from Rmb726bn at the same time in 2020, following a slump in China’s tech stocks.
“We cannot continue to provide unlimited support. We are picking companies that can sustain themselves,” said one Tencent employee familiar with the company’s investment strategy. They added that Tencent has been asked to divest underperforming assets from investors, and the transition is testing the investment team’s boundaries: “We have to think in ways we’ve never thought before,” the employee said.
Tencent’s growing role as a backer of Chinese internet companies has drawn scrutiny from regulators seeking to break the monopolistic grip of the country’s high-tech titans.
The company is the largest investor in food delivery giant Meituan, ecommerce titan Pinduduo, online brokerage Futu and video sharing app Kuaishou.
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A Shenzhen official working in a local branch of the antimonopoly agency said Tencent used the combined power of the universal messaging app WeChat and its deep pockets to support its portfolio companies.
“Consumers are paying the price for the way Tencent has created a defensive ecosystem for its portfolio companies,” he said, pointing out that WeChat has prevented users from sharing links with service competitors in which they have invested. The official said regulators had directed Tencent to divest its stake in major technology companies.
Tencent said, “We [have not] We have received any external pressure regarding our investment portfolio. . . We will continue to make decisions independently and in the best interests of our shareholders in the long term.
An official from the Guangdong office of the anti-monopoly agency, which is involved in the investigation of Tencent’s sprawling tech empire, said: “Tencent has monopoly control over gaming, instant messaging and entertainment.” The company is very humble when dealing with regulators. Still, we need the right moves, like the Rmb100bn donation [to the poverty alleviation fund] or sell shares in listed companies.
Tencent plans to buy back stakes in companies including ecommerce player JD.com and food delivery service Meituan, a member of an investment group said. Two people familiar with the matter said Meituan was not at the top of the investment group’s sales list.
“In the coming months, Tencent will continue to sell listed shares, not just Meituan,” said a person familiar with the matter. Their comments were echoed by two members of Tencent’s investment team.
Reuters previously reported that Tencent plans to sell all or part of its $24 billion stake in Meituan. Tencent said during an August earnings call that the report was “not accurate.”
Tencent added, “We don’t have any target size to dive into. We always invest with the goal of generating strong returns for our company and shareholders, not any arbitrary timeline or target.
Several people familiar with the matter said Tencent had plans to sell some Meituan shares to appease regulators, but that the company was not among its transfer priorities. “Meituan has done well compared to other companies. It can sustain itself,” said one individual.
Investments in China’s technology sector have not completely stopped. In August, Tencent’s corporate venture arm invested in companies in agriculture, robotics, semiconductors and vaccine technology — all sectors identified by Beijing as critical to the country’s efforts to become self-sufficient in science and technology.
A Shenzhen official said that Tencent’s success in investing in China’s growing technology boom meant the company should now do its part by financing companies in state-backed sectors.
“Tencent should bear some responsibility,” he said.
