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Veteran Silicon Valley investor Jim Breyer and Chinese firm IDG Capital Partners have raised one of the largest venture-capital funds in China despite concerns that the market for later-stage startups is overheated.

Mr. Breyer, best known for his early investment in Facebook Inc., and IDG Capital, one of China's top investors, jointly announced Tuesday they raised $1 billion to invest in growth-stage companies both in China and those looking to enter the country. The new fund will make investments in a wide range of industries including technology, media, health care and energy.

The fund is the seventh and largest China investment fund that IDG and Mr. Breyer have sponsored dating back to 2005, according to Dow Jones LP Source. The first five were a collaboration between IDG and Mr. Breyer's old U.S. firm, Accel Partners, and the last two between IDG and Mr. Breyer's new firm, Breyer Capital.

At $1 billion under management, IDG Capital Fund III nearly doubles the prior fund's $586 million. That fund, raised in 2014, was smaller in part because it focused on early-stage startups while the new one is targeting more mature companies. The last growth fund, raised by IDG and Accel Partners, was $750 million in 2011.

One challenge, said Mr. Breyer in an interview, will be finding investments in today's "frothy" market. "When late-stage company valuations are as high as they are today in China and the U.S., prospective returns are much lower than they have been," he said. "I try to remind myself and my Chinese partners: 'Do not pursue high returns in a low-return environment.' "

Of the 10 largest global venture-capital funding rounds this year, six of them involved Chinese companies, according to Dow Jones VentureSource. They include a $4.5 billion investment in Didi Chuxing Technology Co. that valued the ride-hailing company at $28 billion, and a $3.3 billion deal for Meituan-Dianping that gave the e-commerce company a valuation over $18 billion.

Mr. Breyer said that considering the high valuations for private companies, the firm will deploy its capital slowly over three to four years for new investments. "One of the hardest parts of the business to continuously try to master is to come to work and in some cases not make new investments for a year," Mr. Breyer said.

There are other challenges to investing in China. The country restricts foreign investments in certain classes of companies that hope to go public, including internet companies. That may have been a bigger problem a year ago, when the Chinese stock market was rising to new highs. At that point, even some companies trading publicly in the U.S. went private so they could relist in China.

But the Shanghai Composite Index crashed last summer. It is down more than 40% from its 2015 high, reducing excitement locally for highflying tech companies. The volatility was also blamed by many venture capitalists for piercing the bubble that had started to inflate valuations of late-stage U.S. private companies.

The decline in valuations has at least taken some air out of the market, which could bolster future returns. And Mr. Breyer nonetheless remains excited about Chinese investment opportunities. "We believe there are some emerging opportunities around enterprise in China and cloud computing that many global investors outside of China [are] underestimating," he said.

The Breyer-Accel-IDG partnership over the years has resulted in some big winners. One is Legendary Entertainment, which Accel, Breyer Capital and IDG-Accel invested in six years ago and which sold itself for $3.5 billion earlier this year to Chinese conglomerate Dalian Wanda Group Co.

IDG Capital is also an investor in several companies valued at $1 billion or more, including Chinese mobile-phone maker Xiaomi Ltd., last valued at $46 billion, and Chinese e-commerce site Vancl at $3 billion. Its big past bets include Baidu Inc., Tencent Holdings Ltd., and Qihoo 360 Technology Co.

Write to Rolfe Winkler at rolfe.winkler@wsj.com

(END) Dow Jones Newswires

July 12, 2016 11:25 ET (15:25 GMT)

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