Total Amount Invested Grows 70% over Q2’07
BEIJING, July 22 /Xinhua-PRNewswire/ -- The Zero2IPO Research Center announced today that China’s VC industry has been extraordinarily active during Q2’08. Both new funds and the capital raised reached historic highs. The amount of new investment also approached an historic high. The domestic stock market became the main form of exit.
According to Zero2IPO Research Center statistics, a total of 29 domestic and foreign VC firms established 40 funds during Q2’08. This figure represents US$3.02B of capital available for investing in Mainland China marking a record high for a single quarter. Additionally, 159 Chinese entrepreneurial firms receiving venture capital disclosed investment totaling US$1.20B. In comparison with Q2’07, the number of deals and the disclosed investment amount increased 31.4% and 73.5% respectively. Q2 also saw the beginnings of a series of new industry trends. For example, while the industry investment pattern basically remained the same, shares of IT-related investment did increase. Expansion-stage and Late-stage enterprises both gained much more favor from VC, with Expansion-stage firms accounting for over half of the total deals. On the same note, multi-million dollar investment deals accounted for nearly half of the total amount invested. Lastly, domestic VCs performed stronger than their foreign counterparts leading the domestic stock market to become the major exit venue for VC firms.
The Zero2IPO Research Center Q2 Survey and the “China Venture Capital Report Q2 2008” provided the data and conclusions mentioned above. The Zero2IPO Research Center began conducting Chinese VC surveys and creating reports in 2001. Publications are based on real time data collected from 300 active Chinese and foreign VCs that currently operate in Mainland China.
Record High Fundraising Level: 40 New Funds Raise Over US$3B
The volatile global economic situation and dismal domestic capital market performance did not hinder investors’ enthusiasm for China’s venture capital market. A total of 40 funds collectively raised US$3.02B this quarter, marking a record high for a single quarter. China’s VC market seems to have lower investment risks in comparison to the A-share market (which is under substantial adjustment). Meanwhile, Chinese government support along with emerging equity investment and increasingly mature LP groups also accelerated the inflow of capital on the domestic VC market.
Foreign VC firms established seven funds and raised a total of US$1.69B with an average of US$241M. Foreign VCs, like IDGVC, Qiming Venture Partners, and Intel Capital, raised new Mainland China-focused large-sized funds during this quarter. This proves that foreign investors are still optimistic about the development prospects of China’s VC market.
Domestic VC firms established thirty-one funds that raised a total of US$1.18B. This is the first time domestic VC’s broke the US$1 billion level in a single quarter. Even typically risk-averse investors have been actively involved in the domestic VC market.
Investment professionals are increasingly optimistic about RMB funds. Twenty-nine of the thirty-one funds were RMB funds. Five funds took the form of limited partnership (a portion of corporation funds will be restructured as limited partnership funds) and two were trust funds. It has been over one year of development and both institutions and investors accept the new forms of organization. Additionally, two JV funds established by foreign and domestic VC firms raised a collective US$146M (Both were RMB funds).
Figure 1: Total Funds Raised by Quarter, Q2’07-Q2’08
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Total Amount Invested in Excess of US$1.2B, Growing 73.5% Year on Year
Q2 witnessed 159 entrepreneurial firms receive venture capital (A 37.1% increase from Q1). 143 firms disclosed a total investment amount in excess of US$1.20B -- registering a 28.0% increase over Q1. The total number of deals and the total amount invested increased 31.4% and 73.5% respectively in comparison to Q2’07. This quarter’s total investment was only second to that of Q4’07, when 164 firms received US$1.24B (the second highest level in history).
Figure 2: Number of Deals and Total Amount Invested, Q2’07-Q2’08
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Industry Investment Pattern Remains Unchanged; IT-related Investment Sees a Slight Rebound
This quarter the industry investment pattern remained relatively unchanged. VC investment followed this pattern: Broad IT industry continued to lead, Traditional and Services followed (Traditional industry recorded more deals and investment amount than Services). However, Bio/healthcare and Other
Hi-tech sectors attracted less investment. Nevertheless, IT-related investment saw a slight quarter-on-quarter rebound with more IT deals receiving a greater amount of investment.
During Q1, investment deals and total amount invested in the IT industry only accounted for 38.8% and 39.5% of the total (both below 40% for the first time). By contrast, IT industry accounted for 42.1% of deals and 45.9% of amount invested. This fact shows that IT industry is still a key investment field for VC firms. Among its sub-sectors, Internet is still the most popular in attracting venture capital. IT services and Semi-conductor (IC) also accounts for a considerably large proportion of deals.
During Q2, 35 Traditional deals (22.0% of the total) collectively received US$240M (19.9% of the total) of venture capital; 22 Services (13.8% of the total) raised US$180M (14.9% of the total). Traditional deals were distributed among 15 sub-sectors, with the agriculture/forestry/husband/fishing sector being the most popular with five deals.
Over the past few years, soaring prices of international agricultural products, strong demand for consumer goods and widespread of inflation, all drove venture capital investors to invest in agricultural production and its upstream and downstream businesses.
Figure 3: Industrial Distribution by Deal Number & Amount Invested (US$M)
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Expansion-stage Enterprises Contribute Over 50% of Total Deals; Late-stage Enterprises Gain Favor from VC Firms
A total of 85 expansion stage enterprises received venture capital. The disclosed amount of investment reached US$682M, which accounted for 53.5% and 56.6% of their respective total (The Q1 figures were 56.9% and 72.3%). These figures reflect the strong preference of VC firms towards investing in expansion-stage enterprises.
Meanwhile, late-stage enterprises gained more favor of some VC firms. During Q1 late stage represented 6.9% of the total deals and 8.5% of total investment amount, however this quarter a total of 26 enterprises (16.4% of the total) in this stage received US$373M (31.0% of the total). Some VC firms are adopting a prudent and stable investment strategy. They are trying to avoid the negative effects of underperforming domestic and international capital markets, the blocking of red-chip listing model as well as other factors. Given the current investment climate, VCs prefer to invest in mature enterprises with a proven profitability and stable growth model to help mitigate risk and attain quick exit.
Figure 4: Investment Stage Distribution by Deal No. and Amount Invested
(US$M)
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Mega Deals Contribute Nearly 50% of the Total Amount Invested
The second quarter saw small-sized deals frequently emerge: 81 deals with size below US$5M represented 56.6% of the total deals, however they only contributed 17.7% of the total amount invested. Meanwhile, 13
large-sized/mega deals with size of over US$20M only accounted for one tenth of the total deals, but they contributed nearly half of the total amount invested. VC firms preferred to invest either in start-ups or in elite, mature enterprises to share their stable revenue.
Additionally, the distribution of investment scale reflects the specific investment styles of both domestic and foreign venture capital firms. Domestic VCs finalized more deals with a size less than US$5M than their foreign counterparts. Domestic VCs only finalized one deal above US$20M leaving the rest for foreign VCs.
Figure 5: Deal Number and Amt. Invested for Deals with Different Sizes
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Domestic Capital Market Becomes the Major Exit Venue; Domestic VCs Perform Stronger Than Foreign VCs
A total of 36 exit transactions took place during Q2’08. IPO was still the most favored option for venture capitalists to choose from: 18 IPO events made up 50.0% of the total. The industry breakdown went as follows: 17 exits in Broad IT industry and 12 in Traditional industry, taking the top two positions. Additionally, there were three exits in Other Hi-tech, while there were two exits in the Bio/healthcare industry.
A total of 10 VC-backed enterprises attained IPO status this quarter (VC funds launched 18 exits). As for market exit, nine IPO events occurred on the Shenzhen SME Board, and only one on the HKMB. Of the 18 VC IPO exits, twelve took place in Shenzhen and six occurred in Hong Kong. While the domestic and international capital markets continued to plummet and the red-chip listing mode suspends, the Shenzhen SME Board has become the major venue for VC exits.
As for fund type, domestic VCs successfully achieved 28 exits, including 13 exits via IPO. These figures indicate that domestic VCs performed better than foreign VCs in attaining exits. As the domestic capital market opens exit channels, domestic VCs have achieved strong development. As for funds raised, 31 new funds (77.5% of the total) launched by domestic VCs raised US$1.18B (39.2% of the total). In regard to investment, 71 domestic VC-backed deals (44.7% of the total) secured US$293M (24.3% of the total). These figures experienced a substantial quarter on quarter increase.
Figure 6: Exit Distribution by Option & Industry
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http://www.zero2ipo.com.hk/china_this_week/detail.asp?id=6980
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.
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