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Zero2IPO Reports That 10 PE Funds Raise US$12.02B in Q2, Falling from Q1; Central & Western Regions Experience Great Progress; PE Investment in Clean Energy Sector Increases Substantially

Zero2IPO
2008-07-22 22:23 1529

BEIJING, July 22 /Xinhua-PRNewswire/ -- Zero2IPO Group announced today the release of the “China Private Equity Q2 2008” report. The Zero2IPO Research Center -- the research arm of Zero2IPO -- reported that during the second quarter of 2008 China’s Private Equity market fundraising level fell considerably from that of the previous quarter.

According to the report, ten funds targeting Asia (including China) raised US$12.02B over the past quarter. Total funds increased substantially in comparison to the same period of last year. Overall, 37 Chinese enterprises received US$2.56B in investment from over thirty PE organizations. The number of exits continued to decline with only five exits occurring in Q2 (including three IPO events backed by PE investment).

This document provides valuable data and expert conclusions based upon the Q2 survey and the report above. It covers the participation of 75 PE funds with active records investing in Mainland China.

Total Funds Raised Exhibits Year-on-Year Growth and Quarter-on-Quarter Decline

PE funds raised capital during Q2 quite actively. According to the Zero2IPO Research Center statistics, the 10 new funds collectively raised US$12.02B. This figure is up 107.6% when compared to the same period of last year and down by 39.9% in relation to Q1’08. The substantial number of PE funds in China will fuel the development of China’s elite enterprises in the highly competitive business environment.

Figure 1: Total amount & number of newly raised funds, Q1’07 to Q2’08

(Please Click the Link in the bottom of the release)

Meanwhile, fund strategies substantially changed during this period. Capital raised for real estate funds accounted for 8.1% of the total, increasing a bit when compared to 2.5% for Q1’08. Growth capitals continued to exhibit strong quarter on quarter growth. The Q2 figure increased to 57.8% from 46.5% in the first quarter of 2008. PE organizations’ change in strategy structure has twofold implications. First, despite the influence from the subprime mortgage crisis, PE funds are still optimistic about China’s real estate industry. Second, investors are paying more attention to industries with investment opportunities that are fueled by the high growth of China’s overall economy.

Total Amount Invested Remains Stable; Other Hi-tech Industry Receives More PE Investment

Overall, PE investment remained stable in the second quarter of 2008. PE firms invested US$2.56B into 37 Chinese enterprises. The total amount was on a par with that of Q1. However, it fell in comparison to the average amount invested for the entirety of 2007 (US$3.20B).

Figure 2: Overall investment by quarter, Q1’07 to Q2’08

(Please Click the Link in the bottom of the release)

In terms of industry distribution, Traditional industry continued to receive the most PE investment: it accounted for 63.3% of the total quarterly PE investment (higher than the portion in Q1 and roughly equivalent to the 2007 figure). In Q1, the percentage of Traditional PE investment in the total investment is 52.9%. The total share of Traditional enterprise financing for 2007 was 65.0%. This proves that Traditional industry still plays a leading role in attracting PE investment.

Figure 3: Industrial distribution of PE investments by amount invested

(US$M)

(Please Click the Link in the bottom of the release)

Notably, the Other Hi-tech industry accounted for a larger portion of PE investment during Q2 (21.4%) than that during Q1 (3.6%). This trend is partly due to a rapid increase in the amount invested in the clean energy sector. This also reflects the increasing importance of clean energy investment with stricter environmental protection and exorbitantly high oil prices.

Central and Western Regions Stand Out; Investment in Traditional Three Economic Growth Regions Tends to Be Evenly Distributed

Concerning regional distribution of PE investment, Jiangxi won the top position with two deals receiving US$426.40M. Henan and Shanxi recorded two deals, garnering US$54.37M and US$60.00M respectively. Hubei and Hunan recorded one deal each, receiving US$349.96M and US$83.09M respectively. Other central and western regions such as Inner Mongolia, Xinjiang, Sichuan, and Guangxi also performed well.

Figure 4: Regional distribution of PE investments by amount invested (US$M)

(Please Click the Link in the bottom of the release)

The most extensive regions of PE investment include the Yangtze River Delta region, the Pearl River Delta region and the Bohai Rim Zone. For the most part, during this quarter investment in these three regions was evenly distributed. During Q2 Beijing only ranked No. 3 with US$394.88 million, which is a sharp fall from last quarter’s US$1.33 billion. Guangdong (excluding Shenzhen) received 15.6% of total PE investment (this region only received 1.0% of total PE investment during Q1). Shanghai also received more investment this past quarter. The total amount of investment in Shanghai increased to 5.1% this past quarter from 3.7% during the previous quarter. Jiangsu and Zhejiang also received more investment. Overall, PE investment distribution of the three economic regions tends to be balanced with a shrinking gap between different regions.

Share of Growth Capitals Drops, While Shares of PIPE and Bridge Capital Rise

From a strategic distribution stance on PE investment, growth capital still occupied the overriding position albeit the proportion declined sharply. During Q1’08, the aggregate amount totaled US$2.09B, accounting for 78.0% of the quarterly total. During Q2’08, the total amount was US$1.27B, representing 49.7% of the total. This quarter, the average of PE deals adopting such a strategy decreased to US$49.00M from US$77.00M in Q1.

This quarter PE investment adopting bridge capital totaled US$567.00M, accounting for 22.1% of the quarterly total (The comparable figures for Q1 are US$147.00M and 5.5%). The total amount of PIPE reached US$548.00M, representing 21.4% of the total. This amount increased from US$177.00M during Q1 (6.6% of the total). The change in diversification strategy of PE investments reflects the current poor performance of the capital market and the heightened risk of investment exit.

Figure 5: PE strategy allocation by amount invested & deal number (US$M)

(Please Click the Link in the bottom of the release)

PE Exits Remain Stagnant; Exit Options Require Improvement

This quarter PE exits remained stagnant as the number of total exits decreased to only five. The number decreased by 37.5% in comparison to Q1 statistics.

All five exit events in Q2’08 were in the form of IPO. Since the first quarter of 2008, exit events lessened. The following three factors directly lead to the continual stagnancy of PE exits: the continued worsening of international capital markets, the sharp plummeting of the domestic stock market and the new strict regulations published by the regulatory organs. We estimate when the stock market begins to see signs of a rebound there will be more exits especially in the forms of IPO and secondary offers. There were no trade sales (stake transfer between financial investors) or M&A (financial investors transferring stakes to strategic investors) within the survey scope of Zero2IPO.

Given the overall exit performance during the past two quarters, we think exit options need to be improved. We at Zero2IPO feel that this is still one of the major issues facing the development of China’s PE market.

Outlook for 2008: Excess of US$10B Funds Disbursed in Mainland China, Central and Western regions Experience fast growth

Global capitalists are chasing PE markets in China and Asia due to its favorable development. In Q2’08, the total amount of funds invested in China grew to US$12.02B. This number is relatively less than that of Q1, but it still maintained a high level of growth. The Zero2IPO Research Center has executed a comprehensive analysis of historical data and we project that the total fund size for China in 2008 will most likely exceed US$50.00B. If there are no unforeseen major market fluctuations, there will be over US$10.00B of funds injected into Chinese enterprises in 2008.

Traditional industry will take a vital position, but the PE allocation in different industries will undoubtedly change substantially. Specifically, the Real Estate industry may regain momentum after encountering a downturn amid market instability and tight monetary policy. With the fast emerging 3G applications and the integration of the three networks (telecommunication network, computer network and CATV network), Broad IT will receive even more funds. In Other Hi-tech sector, the wave of investment in China-based clean tech enterprises will continue in 2008. This is thanks to the tremendous demand for traditional energy alternatives on the global market.

PE investment across China, including the three traditional economic growth regions, will be distributed evenly amongst all regions. According the Zero2IPO Research Center’s Q2 data, central and western regions of China received more funds (We gave the similar outlook during Q1). We estimate that PE investment distribution in the three traditional economic growth regions will tend to be balanced during the second half of the year.

The 27 growth capital investments accounted for 73.0% of the quarterly total in Q2. Growth capital remained the overriding strategy form. With the launch of the GEM board and the rebound of the stock market, IPO and PIPE will continue to experience continued growth.

For more information please click:

http://www.zero2ipo.com.hk/china_this_week/detail.asp?id=7033

About Zero2IPO Research Center

Founded in November 2001, the Zero2IPO Research Center provides a full range of business research reports and customized research solutions for investment professionals in the Greater China Region. Our research ranges from Venture Capital, Private Equity, IPO, M&A to TMT industries. The Zero2IPO Research Center sets itself apart from competitors as the most prestigious research institute in China’s VC and PE spheres.

Note about Citation

For any quotations, please note it is quoted from “China Venture Capital Report Q2 2008” and send two copies of your newspaper to:

Aileen Huang

Suite 1203, Tower A, Eagle Plaza, No. 26,

Xiaoyun Road, Chaoyang District, Beijing, 100125, China

Tel: +86-10-8458-0476 x8037

Or email the website link of your article to aileenhuang@zero2ipo.com.cn

Source: Zero2IPO
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