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Venture capital market enjoys surge in funds

By Bi Xiaoning (China Daily)
Updated: 2009-07-27 15:10

A Starbucks employee serves customers in Beijing, H&Q Asia Pacific, one of the largest venture capital firms in the Asia-Pacific region, is a major shareholder of Beijing Media Coffee Co Ltd, Starbucks' licensee in North China. [Agencies]

China's venture capital market experienced an upsurge in fundraising and investments in the second quarter, signaling growing confidence in China's economy, according to a new report from the market researcher Zero2IPO Group.

According to the report, 17 funds were established in the second quarter, among which newly raised funds available for investment in China's mainland totaled $1.37 billion.

The number of new funds increased by seven, and newly added capital increased by 53.8 percent from the previous quarter.

"The Chinese venture capital market is at a turning point," said Zero2IP Group CEO Gavin Ni.

"Backed by governmental fiscal stimulus monies and policies designed to encourage investment, the markets have shown signs of warming up," he said.

Ni said China's robust economic recovery, pending initial public offerings (IPOs) and new rules for listing on the Growth Enterprise Board (GEB) have attracted the positive attention of investment institutions at home and abroad.

In the second quarter, 99 Chinese enterprises attracted venture capital investments, including 77 that reported investments totaling $567.89 million.

Upward trend

These numbers point to a reversal of a downward trend in venture capital investments that had started during the second quarter of 2008.

The Zero2IPO report showed that both the number and amount of investment deals rose quarter-on-quarter.

The number of deals increased by 46, or 86.8 percent. The amount involved increased from $319.68 million in the previous quarter to $567.89 million.

The report also stated that fast-developing renminbi funds are gradually taking the lead in fundraising on the Chinese venture capital market.

There were 13 renminbi funds raised by Chinese and overseas venture capital institutions. Funds invested totaled $402.18 million, accounting for 76.5 percent of the fundraising deals.

Nearly 60 percent of investment deals involved an amount less than $5 million; thus, small-scale investments remained dominant in the second quarter, the report stated.

"Investors tended to be more cautious about pouring large amounts of money into investments in a stagnant global stock market," Ni said.

Similar to findings for the recovering venture capital market, the report showed that China's private equity market also picked up moderately in the second quarter.

PE funds

According to the report, a total of five private equity (PE) funds available for investment in China completed fundraising totaling $1.82 billion -- a three-fold increase from the first quarter.

The reported cited 13 investment deals on China's mainland involving a total $5.31 billion. That amount represented a tenfold increase from the last quarter's $470 million.

The huge increase largely was due to the Hopu Capital-led investment group, which took more than 13.6 billion H- shares of China Construction Bank -- about 5.78 percent of the bank's total issued shares -- from the Bank of America for $7.3 billion.

PE funds, including Hopu Capital, bought 8.53 billion of the shares for $4.62 billion.

"Although the total amount of newly raised capital rose quarter-on-quarter, investors worldwide have strengthened their performance of due diligence by fund management companies due to the shocks from the financial storm," Ni said.

That caution is increasing difficulties in raising funds and also prolonging fundraising cycles, Ni said, adding that it might take a long time before private equity fundraising really takes off.

Buoyed by the recovering IPO market, the exit of venture capital and private equity gained momentum.

In the second quarter, five venture capital or private equity-backed Chinese enterprises went public overseas, raising a combined $1.77 billion.

Both the number and financing amount reached new highs since 2008, the report added.

On a year-on-year basis, the number of IPOs was down by nine, but financing totals increased 46.7 percent.

Quarter-on-quarter, the number was up by three, and the financing totals rose by 11.57 times.

According to the report, the listings of these enterprises will enable 11 venture capital and private equity funds to exit their investment after the expiration of a lock-up period, demonstrating a pickup in overseas deals by investment institutions.

M&A channels

Besides the IPO market, merger and acquisition (M&A) channels also are a main way to send investments overseas.

According to the Zero2IPO report, 10 VC/PE-related M&A deals were closed in the second quarter, eight of which disclosed a total value of $235.66 million.

Six of the deals occurred in the IT industry, two in traditional sectors and another two in the growing bio/healthcare sector.

The report also revealed that mega-value overseas acquisitions dominated the cross-border M&A market.

A total of 13 cross-border M&A deals were completed in the second quarter, and 10 of them disclosed a total of $4.31 billion.

Compared with the same period last year, the number of cross-border M&A deals fell 40.9 percent, but the total M&A value jumped 178.5 percent.

This increase was attributed to the mega-value overseas acquisitions carried out by Chinese companies like China National Petroleum Corp (PetroChina) and China Minmetals Corp, which pushed up the average M&A value of cross-border deals, the report said.

"According to the feedback from overseas investors, China remained one of the most attractive investment markets in the world," Ni said.

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