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Private equity, venture capital power growth of startups
By Gao Jianbin |
February 9, 2012, Thursday
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Print Edition
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DESPITE the uncertainty arising from the European debt crisis and the slow recovery of the US economy in America, the scale of fund raising by private equity and venture capital funds in China reached a record high in 2011, in terms of both the number of new funds established and the aggregate amount of funds raised.
With the tight macro-control of monetary policies, these funds acted as a local economy booster. They provided timely and necessary operational financing to many good quality, small-to-medium privately held enterprises when financial institutions were reluctant to lend them due to their limited operating history.
China's Growth Enterprise Market, established in 2009, has continued to provide a quick channel and high IPO exit multiples, stimulating the flow of capital into the private equity and venture fund industry to maximize returns.
In addition to the GEM factor, the significant growth of domestic limited partnerships and preferential policies granted by local governments on US dollar-denominated funds to set up renminbi funds also contributed to a record high of yuan fund-raising in 2011.
While the private equity and venture capital industry enjoyed record success in 2011, the pace of fund-raising clearly slowed in the fourth quarter of 2011. The significant slump in the A share stock market gradually dragged down IPO exit multiples.
Market uncertainty
The situation was exacerbated by the continuous rise in the investment cost of portfolio companies and the uncertainty surrounding overseas stock markets, which significantly added to doubts about whether the investment return in this industry will be sustainable.
In addition to the continuing macro-control policies implemented by the central government, some limited partnerships from these privately held enterprises faced significant liquidity issues since the second half of 2011. All these factors contributed to a slowdown in fund-raising, and we anticipate this situation will continue in 2012.
Compared with such mature capital markets as the US and Europe, China's private equity and venture capital industry is still considered relatively young. It started with sizable fund-raising and investment from 2005. With the continuous growth of China's economy, the long-term trend of the private financing industry in China is definitely striving upward, but with small, short-term fluctuations.
For two consecutive years beginning in 2010, renminbi funds have outpaced growth in US dollar funds to become a dominant arm of the private equity and venture capital industry in China. The launch of China's GEM set the milestone for renminbi funds. This important platform will continue to thrive and contribute to the reform of China's economic structure, which is taking place gradually and is vital to the economic development of this nation in the next 10 years.
The outlook for the private equity and venture capital industry in China for the next 10 years contains three aspects.
First, investment strategy will diverge to focus more on early-stage companies with extraordinary potential rather than just pre-IPO companies. With the drop of IPO pricing and strong competition in targeting these pre-IPO companies, private equity and venture capital funds will be forced to focus their strength and energy on identifying future stars from a bunch of fast-growing companies;
Second, greater transparency and external regulatory monitoring is likely. The recent release of the "Circular regarding the Promotion of Sound and Compliant Development of Equity Investment Enterprises" by the National Development and Reform Commission on November 23, sends a strong signal for tight regulatory monitoring. From a long-term perspective, the market move for transparency and regulatory compliance requirements will result in a healthy environment for the industry.
Last, General Partners of private equity and venture capital funds will continue to play an increasingly significant role in mentoring small-to-medium enterprises with fast growth potential, bringing not only financial backing but also management expertise in the business expansion phase.
When we look back over the past 10 years, many enterprises, such as Baidu, Sina, Sohu, CTrip, Alibaba and Tencent, have changed the way we do business and the way in which investment at an early stage played a part.
Gao Jianbin is the Central China Leader of Private Equity Group at PwC.
With the tight macro-control of monetary policies, these funds acted as a local economy booster. They provided timely and necessary operational financing to many good quality, small-to-medium privately held enterprises when financial institutions were reluctant to lend them due to their limited operating history.
China's Growth Enterprise Market, established in 2009, has continued to provide a quick channel and high IPO exit multiples, stimulating the flow of capital into the private equity and venture fund industry to maximize returns.
In addition to the GEM factor, the significant growth of domestic limited partnerships and preferential policies granted by local governments on US dollar-denominated funds to set up renminbi funds also contributed to a record high of yuan fund-raising in 2011.
While the private equity and venture capital industry enjoyed record success in 2011, the pace of fund-raising clearly slowed in the fourth quarter of 2011. The significant slump in the A share stock market gradually dragged down IPO exit multiples.
Market uncertainty
The situation was exacerbated by the continuous rise in the investment cost of portfolio companies and the uncertainty surrounding overseas stock markets, which significantly added to doubts about whether the investment return in this industry will be sustainable.
In addition to the continuing macro-control policies implemented by the central government, some limited partnerships from these privately held enterprises faced significant liquidity issues since the second half of 2011. All these factors contributed to a slowdown in fund-raising, and we anticipate this situation will continue in 2012.
Compared with such mature capital markets as the US and Europe, China's private equity and venture capital industry is still considered relatively young. It started with sizable fund-raising and investment from 2005. With the continuous growth of China's economy, the long-term trend of the private financing industry in China is definitely striving upward, but with small, short-term fluctuations.
For two consecutive years beginning in 2010, renminbi funds have outpaced growth in US dollar funds to become a dominant arm of the private equity and venture capital industry in China. The launch of China's GEM set the milestone for renminbi funds. This important platform will continue to thrive and contribute to the reform of China's economic structure, which is taking place gradually and is vital to the economic development of this nation in the next 10 years.
The outlook for the private equity and venture capital industry in China for the next 10 years contains three aspects.
First, investment strategy will diverge to focus more on early-stage companies with extraordinary potential rather than just pre-IPO companies. With the drop of IPO pricing and strong competition in targeting these pre-IPO companies, private equity and venture capital funds will be forced to focus their strength and energy on identifying future stars from a bunch of fast-growing companies;
Second, greater transparency and external regulatory monitoring is likely. The recent release of the "Circular regarding the Promotion of Sound and Compliant Development of Equity Investment Enterprises" by the National Development and Reform Commission on November 23, sends a strong signal for tight regulatory monitoring. From a long-term perspective, the market move for transparency and regulatory compliance requirements will result in a healthy environment for the industry.
Last, General Partners of private equity and venture capital funds will continue to play an increasingly significant role in mentoring small-to-medium enterprises with fast growth potential, bringing not only financial backing but also management expertise in the business expansion phase.
When we look back over the past 10 years, many enterprises, such as Baidu, Sina, Sohu, CTrip, Alibaba and Tencent, have changed the way we do business and the way in which investment at an early stage played a part.
Gao Jianbin is the Central China Leader of Private Equity Group at PwC.
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