Driving Business Growth Through Investment Funds: Analyses and Practical Insights for Chinese Biotechs
Over the past few years, we have been deeply engaged in – and have closely observed – the rapid growth of Chinese biotech companies. Despite a challenging market environment, these companies have continued to make remarkable strides, driven by ongoing innovation and resilience. One notable example is the emergence of the highly anticipated “NewCo” model for international expansion, a model that has paved the way for globalization by enabling Chinese biotech companies to strategically deploy research and development and commercialization resources in more mature overseas markets. Its success has relied heavily on partnerships with experienced international players, typically robust investment funds in target jurisdictions. This case exemplifies how private equity/venture capital (PE/VC) funds have become essential catalysts for the growth of Chinese biotech companies.
We note that Chinese biotech companies are employing a diverse and multifaceted approach to leveraging investment funds for business development. Their involvement goes beyond merely being investees of these funds; many also are actively participating in fund management and building their own investment platforms. According to PitchBook, since 2020, Chinese biotech companies have subscribed as limited partners (LPs) in 178 PE/VC funds, most of which target the biotech and healthcare sectors. Furthermore, 36 companies have launched their own biomedical-focused funds with external capital, either as fund managers or co-managers. On the corporate venture capital (CVC) front, 95 CVCs in China have invested in the biotech, pharmaceutical and healthcare sectors, representing nearly 60% of all CVCs active across industries. Investment funds have thus emerged as a critical tool for biotech companies seeking to pursue strategic investments and broader industry positioning.
In this article, we explore this evolving trend and analyze the legal structures and practical considerations associated with the primary models in use. Our goal is to offer insights that can help companies identify and implement structures aligned with their strategic objectives. This article focuses specifically on US dollar-denominated (USD) PE/VC funds.
Overview of fund deal structures
Chinese biotech companies are currently employing a range of deal structures when making strategic investments through investment funds. These structures span from passive roles as LPs to more active participation as general partners (GPs). Specifically, the key structures include:
Model 1: Participation as an LP
- The company subscribes to fund interests and invests in single-project or blind-pool funds managed by third-party fund managers.
- In this model, the company typically relies on the expertise of the fund manager to identify and screen high-quality projects, gaining indirect exposure to investment returns.
Model 2: Direct investment in target projects
- The company uses its own capital to invest directly in promising biopharma projects.
- This model allows for a higher degree of involvement in project-level decision-making and resource allocation.
Model 3: Co-GP model with professional fund managers
- The company partners with a professional fund manager to jointly act as co-GPs of the investment fund, sharing management responsibilities.
- Through this collaboration, the company can leverage the fund manager’s project experience and industry resources while retaining a level of influence over investment decisions.
Model 4: Independent fundraising and management as a GP
- The company independently sponsors and manages an investment fund and also may raise capital from external investors.
- This model requires the company to possess strong capabilities in resource integration and project management.
Each model offers distinct advantages, providing companies with flexible options to address their capital needs and project goals at various stages of business development. In practice, a company should align its choice of participation model with its internal resources and strategic objectives to determine the most suitable approach.
The following diagram illustrates the most common deal structures adopted by companies when engaging in investment fund transactions through different models.
Diagram of key deal structures
To further illustrate the distinctions between these participation models, the table below summarizes their key features, such as funding sources, contribution requirements and decision-making influence.
| Model | ① LP in biopharma single-project fund | ② LP in biopharma blind-pool fund | ③ Direct investment | ④ Co-GP with professional fund manager | ⑤ Independent fundraising and management as GP |
| Source of funds | Self-owned funds | Self-owned funds | Self-owned funds | Combination of self-owned funds and external capital raised | Combination of self-owned funds and external capital raised |
| Contribution requirements | Varies based on project size and equity share | Typically requires a higher contribution (e.g., 10%+ as a cornerstone investor), though flexibility exists for strategic partners | Varies based on project size and equity share | For blind-pool funds, the market generally expects a GP’s cash contribution to be no less than 1% of the total fund size, shared between the company and its partners (with contribution ratios negotiated) and made in parallel with LP contributions | For blind-pool funds, the market generally expects a GP’s cash contribution to be no less than 1% of the total fund size, fully borne by the company (and its affiliates) and made in parallel with LP contributions |
| Requirements for own fund’s volume | Varies based on project size | The company often establishes a dedicated investment vehicle, typically in the form of a corporate venture capital (CVC) fund, particularly for investments in blind-pool funds and direct project investments; the size of the CVC fund is closely tied to the company’s overall size and development stage | Varies based on project size | In practice, the company (rather than its partnered professional manager) is usually the primary investor | For new USD funds sponsored by the company, it must have sufficient capacity to fulfill the capital contribution obligations typically assigned to the GP |
| Requirements for sourcing quality projects | Low; the company must screen and assess the quality of underlying projects selected by the fund | Low; the main challenge for the company is selecting a fund manager that aligns with its needs and fully entrusting the manager with the task of sourcing and securing quality investments | High | Generally high (depending on the division of responsibilities between the company and its partnered manager) | High; the company must rely on internal incubation or hire a professional investment team to screen for high-quality projects |
| Influence on fund decision-making | Generally low, as decision-making resides with the fund’s GP; however, a company investing through a single-project fund may negotiate certain rights similar to those of direct equity holders, including information rights and voting rights based on its look-through ownership percentage | Low, as decision-making resides with the fund’s GP; as a cornerstone investor or strategic partner, the company may enjoy certain preferential rights (e.g., priority access to information on jointly invested projects) or voting rights on investor advisory committees, but it does not have direct legal influence over the GP’s decisions | N/A | High, as key issues, such as investment decisions, post-investment management and exit strategies, typically require joint approval; the company also may negotiate veto power over other significant matters relating to fund operations, such as annual budgets or the hiring of investment professionals | The company (or its affiliates) has 100% decision-making power over fund affairs |
| Management fees and carry | The company generally pays management fees and carry (if applicable) to the relevant fund manager; adjustments or exemptions can be negotiated | The company generally pays management fees and carry (if applicable) to the relevant fund manager; adjustments or exemptions can be negotiated | None | Management fees and carry constitute the co-GPs’ income, and the distribution arrangement must be negotiated with the partner | Management fees and carry are fully retained by the company (or its affiliates) providing the cash flow necessary to support the operations of the fund manager and the investment team; fee amounts vary based on fundraising progress and the proportion of external capital raised |
Conclusion
In summary, investment funds have emerged as a critical instrument for Chinese biotech companies seeking to drive business growth and advance strategic initiatives. By enhancing their ability to access high-quality projects, integrating industry resources and fostering innovation, the flexible application of various transaction models has unlocked broader development opportunities. We look forward to seeing Chinese biotech companies continue to pioneer innovative approaches and achieve new milestones in their journey toward globalization.
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