The financial crisis that started in late 2007 has been called by many experts the worst downturn since the Great Depression of the 1930s. As an integral part of the global economy, China was not immune. The credit crunch and downward trend in global stock markets led to a decrease in the flow of foreign capital into China from offshore investment firms in 2008 and 2009.
Nevertheless, following a turbulent course in 2008 and early 2009, China's private equity and venture capital markets have slowly, but steadily, shown signs of a rebound. Although the future still remains uncertain, a review of China's PE and VC markets in 2009 may lift hopes for recovery in 2010 and beyond.
When the market data is presented on a year-by-year basis, the PE market in China declined significantly in 2009. As of Nov. 30, Asian (including Chinese) PE funds raised a total of $12.38 billion. This is down 79.7% from 2008. In addition, PE institutions closed only 102 investment deals in China, with a total of $8.43 billion, down 12.3% from 2008. The first 11 months of 2009 also saw 40 more PE funds exit from China than in 2008, with a total of 64 exits.
In a reflection of the broader PE market in China, the number of funds and the total amount raised in China by domestic and foreign VC firms in the first 11 months of 2009 also declined from their peak in 2008. A total of 90 new funds were raised in China by domestic and foreign VC firms, down 22.4% from 2008, and the total amount of capital available for investment in mainland China stood at $5.09 billion, down 30.4% from 2008.
When the numbers are broken down by quarters, however, the 2009 data is more promising. For example, the number of PE investments disclosed in the third quarter of 2009 increased by 61.9% from the previous quarter. It was also the highest number of PE investments closed since the third quarter of 2008. The average amounts of the investments in the third quarter also increased by 16.7%, from $72.63 million in the second quarter to $84.79 million in the third quarter. In fact, five of the 34 investments totaled more than $100 million each, and the number of investments in the $30 million to $50 million range increased by 166.7%.
Likewise, a quarterly examination of the VC market in mainland China shows that its performance was similar to that of the larger PE market in terms of the number of VC investment deals and the investment amounts. The third quarter of 2009 saw newly raised money available for VC investments rise to $1.26 billion, a 6% increase from the previous quarter. Eighteen funds were established by Chinese and foreign VC firms in the third quarter. The VC firms invested in 122 enterprises with a disclosed amount of $785.12 million. This represents a 23% increase in the number of VC-invested enterprises and a 38% increase in the VC investment amount from the previous quarter.
In the upward trend in 2009, renminbi funds were the clear leaders. In the VC market, 82 of the 90 newly raised funds in the first 11 months of 2009 were renminbi funds, accounting for 91.1% of the total. In terms of the amount raised, renminbi funds raised $3.53 billion, accounting for 69.4% of the total. In the PE market, all of the six funds targeting the Asian (including Chinese) market in the third quarter of 2009 were renminbi funds, further demonstrating the developing trend toward renminbi PE funds in recent years.
Many experts also think that renminbi funds in China are destined to develop further and ultimately take the lead thanks to large investments expected from China's social security fund and the increased support from the China Securities Regulatory Commission.
How China's VC and PE markets ultimately fare in the changing global
economic climate remains to be seen. What is clear, however, is that
China's VC and PE markets continue to develop and there is a blend of
optimism and pessimism, reflecting broader global sentiment. Some
investors believe returns from PE and VC exits will decline as a result
of equity- market volatility and market uncertainty, among other
factors. At the same time, others see a good opportunity in China with
companies seeking to secure funding amid the credit crunch and turning
to PE and VC funds for growth in the still relatively dynamic Chinese
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Mark R. Williams is a partner in the corporate and securities group, and Sarah Wang and Cathy C. Yu are associates at DLA Piper in Chicago. Mr. Williams opened DLA Piper's Doha, Qatar office and previously served as managing partner of the firm's Beijing office.