Driving Business Growth Through Investment Funds: Analyses and Practical Insights for Chinese Biotechs | Cooley LLP

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.

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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