Adam Schwab: Shein’s US$1 billion raise shows private equity firms are still going strong, pandemic or not

It was possibly the biggest capital raise from a business that you probably haven’t ever heard of. E-commerce operator Shein raised US$1 billion ($1.32 billion) at a staggering US$100 billion ($132 billion) valuation this week, which is astonishing for a fast fashion online business based out of China.

Shein appears to have had a very good pandemic, last raising at a respectable US$15 billion ($19.8 billion) valuation in 2020. And these aren’t two-bit investors, with General Atlantic, Tiger Global and Sequoia Capital all participating in the latest round. These are three of the most respected growth equity firms globally.

The company, which doesn’t sell to Chinese customers, targets US-based young female customers with stylish and inexpensive designs, competing against the likes of H&M, Forever 21 and Zara. And it’s no slouch traffic wise: its US site receives more than 100 million visits every month (it is around the 100th most trafficked site in the US).

But the sheer size of the valuation was most surprising, and it shows late-stage private markets haven’t suffered the same challenges that publicly listed growth firms have in recent months.

As a comparison, global marketplace and payments giant Alibaba has a valuation of US$300 billion ($395 billion), while H&M has a relatively trifling valuation of US$20 billion ($26.35 billion). The raise places Shein alongside San Francisco-based payments giant, Stripe, which also raised at a US$100 billion valuation in 2021.

The high valuations to an extent reflect the volume of money being invested in venture funds, especially US venture funds. Tiger Global, the world’s most aggressive growth investors, is currently finalising an US$11 billion ($14.49 billion) fund, while Softbank’s Vision Fund 2 raised US$30 billion ($39.5 billion) in 2021 (down from its first comically large US$100 billion fund but still huge).

Growth investors aren’t paid much to have cash sitting in the bank; they will usually receive 2% management fees for all invested funds, but generate most of their returns from the usual 20% performance fees above a benchmark return level.

The influx of cash, which is largely centered around later stage businesses like Shein (rather than seed or series A type businesses) has expectedly led to an explosion of valuations, which like any bubble, will likely revert to the mean in the next year or two as returns aren’t able to match the excitement.