Venture capital and private equity research, advisory and investing organisation Zero2IPO Group recently released its Research Report on China Venture Capital Investment in the Third Quarter of 2007, which gave the following indications: a total of 13 venture capital investment organisations raised a total of US$1.322 billion in the third quarter; the amount of capital raised declined quarter on quarter, but the number of funds and newly added capital raised by local venture capital organisations increased substantially to renew the quarterly record amount of investment achieved in the previous quarter.
According to the report, the amount of capital raised by venture capital funds slid, while new funds emerged one after another. Following robust growth of capital raised which reached a record high of US$2.359 billion in the second quarter, the momentum did not last in the third quarter. Although the number of newly launched funds, at 13, remained the same as in the second quarter, the amount of newly raised capital was only US$1.322 billion, down 43.9% quarter on quarter. The decrease of newly launched funds by foreign venture capital organisations was attributed as the main cause for the decline of total capital raised by venture capital funds in the third quarter. In the second quarter, the organisations raised 10 "large scale" funds, which digested big amounts of money hoping to enter the Chinese venture capital market. The Chinese government's wait-and-see policy towards the domestic listing of red chip stocks listed in Hong Kong and other policies in the aspect of market withdrawal made foreign venture capital organisations more prudent in considering the launch of RMB funds or establishment of joint venture funds.
On the contrary, China's local venture capital organisations were very active. In the third quarter, eight local venture capital funds were launched, raising US$330 million, or three times as much as the figure for the previous quarter. A total of 88 enterprises obtained capital support from venture capital organisations, 75 of which have unveiled their investment schemes amounting to US$897 million. Although the number of investment projects was smaller than the 121 in the previous quarter, the total amount of investment advanced by another 29.2% on the base of the record figure of US$694 million for the previous quarter.
In terms of investment fields, the investment in the IT industry slid, with the proportion in the number of investment projects down from 57.9% in the previous quarter to 40.9% and that in the amount of investment down from 61.5% to 43.4%, both below 50%. Meanwhile, the proportion of investment in service industries rose to 18.2% in number and 23.5% in amount of capital, from 10.7% and 10.2% respectively in the previous quarter. A total of 16 growth enterprises in service industries acquired venture capital investment in the third quarter, of which six each raised capital in excess of US$10 million. The favoured sub-sectors included education and training, hotel, media and entertainment. The big average amount of investment is another feature of venture capital investment in China in the third quarter. The average amount of investment stood at US$11.9535 million, far higher than the US$6.1412 million for the previous quarter. Except for traditional industries with average amount of investment of US$8.9117 million, the figure for other industries all exceeded US$10 million, with that for the service industries hitting US$21.046 million. The number of big investment projects each involving over US$10 million hit 28, or 37.3% of the total, and their amount of investment hit US$704 million, or 78.5% of the total.
Due to the influences of macro regulation, the IPO and listing places of venture capital projects changed much in the third quarter, with more and more venture capital projects planning to withdraw on the mainland capital market. The number of overseas IPOs backed by venture capital dropped from 25 in the previous quarter to 10 in the third quarter, while the IPOs on the Shenzhen (small- and medium-sized enterprises board) and Shanghai bourses hit 19, or 65.5% of the total. That is to say, the domestic market replaced overseas markets to become the main channel for the withdrawal of venture capital.
In the current stage of development of China's venture capital industry, increasing foreign venture capital organisations are entering China, while local enterprises are comparatively not so enthusiastic. The Research Report on China Venture Capital Investment in 2006 released by the China Venture Capital Research Institute shows that of the newly raised venture capital in China last year, 68.7% was overseas capital, while local capital took a share of only 31.3%. In the past two years, foreign venture capital organisations saw booming development in China. Their total number has topped 100, with capital amounting to US$20 billion. The main cause for "coldness" of domestic venture capital lies in "mechanism" problems, i.e. the "state ownership nature" of local venture capital organisations is unable to match the industrial features of a venture capital industry being highly market oriented, highly competitive, with the ability to react quickly.
Venture capital in China has embarked on the track of rapid development in recent years. According to the 2007-2008 China Venture Capital Industry Analysis and Investment Consulting Report released by OCN.com.cn, the organisations in China invested in 3,916 projects in 2005, of which 2,453 or 63% of the total were new and high-tech projects, and the cumulative investment totalled RMB32.61 billion, of which RMB14.91 billion or 46% of the total went to new and high-tech enterprises. By industrial distribution of the venture capital investment in 2005, the semi-conductor industry, traditional manufacturing industries, new energy and energy-saving technology, bio-technology and the IT service industry were the top five receivers of venture capital investment, with an investment concentration rate of 48.7%, up from 45.7% in 2004 but still lower than the 56.3% in 2003. In the first half of 2006, venture capital investment in China totalled US$772 million, up 128% from the US$339 million for the whole of 2005. In 2007, the global venture capital investment will possibly remain at the level of US$27 billion. For China, the probability of seeing an increase of venture capital investment in 2007 is 93%, that to see no change is 5% and that to see decline is only 2%.
Bo Ya
