VC funds in firms down 40 percent in 2012
Updated: 2013-02-28 11:43
By Hu Haiyan (China Daily)
Investment of venture capital in Chinese companies declined significantly in 2012, the result of a chilly market for initial public oJerings of stock, according to Dow Jones VentureSource.
According to data published on Tuesday by the industrynews provider, the value of venture capital in Chinese firms last year totaled $3.7 billion, down 40 percent from 2011. The number of venture-capital deals decreased by 44 percent to 202.
"Because the VC industry is strongly aJected by and closely connected to the overall macroeconomic environment, the slower economic growth in China led to many VC companies going bankrupt," said Liu Zhou, founder and managing director of Fortune Capital, a Shenzhen-based firm.
"For VC investors, how to exit their investment at the downturn of the global IPO market, which was a major exit channel, is a big challenge," Liu said.
According to a recent report by Beijing-based Zero2IPO Group, a private-equity and venture-capital research firm, in 2012 the number of Chinese companies that listed for the first time was just 201. Funds raised by these companies was $26.3 billion, a drop of 57.2 percent from the $61.5 billion raised through IPOs in 2011.
The report also showed that the number of Chinese companies that went public in international markets last year was just 47, declining from 75 in 2011, while funding from these $oats dropped to $9.8 billion from $17.8 billion, a year-on-year decrease of 44.9 percent.
Gavin Ni, founder and president of Zero2IPO Group, said that besides weak global economic conditions that persisted through much of 2012, reports of financial and accounting irregularities at several US-listed Chinese companies made the investment climate worse for venture investors.
Near-term prospects for China's domestic IPO market aren't likely to thrill these investors, Ni said.
"There are 808 companies waiting to go public in China," he said. "Just seeking an IPO is not a sensible way for Chinese VC companies to deal with the tough situation. They should adopt a more mixed portfolio of investment strategies such as mergers and acquisitions to unlock the full potential of their investments."
Hugo Shong, founding general partner of private-equity firm IDG Capital Partners and president of IDG Asia, said that due to the bleak IPO outlook, the ratio for return on investment isn't as high as it was.
"It is likely that it will take at least another two to three years for all these 800-plus companies to get listed," Shong said. "It is important that VC investors diversify their exit channels to reduce potential losses, such as considering an M&A route as an alternative exit strategy."
Some venture firms have already started in this direction and more are expected to follow in 2013.
Qiu Bochun, a lawyer in China for US-based firm Cooley LLP, said that slow growth has led to lower prices of many high-quality assets in the United States and Europe.
"This offers good opportunities for Chinese companies to conduct overseas M&A," he said. "But Chinese companies need to be more cautious when they go abroad because of the different cultural and investment environments in diJerent nations."