Chinese Venture Fundraising Hurt by Fears Over Economy

August 1, 2013 Leave a comment

July 31, 2013, 5:42 a.m. ET

Chinese Venture Fundraising Hurt by Fears Over Economy

Economic Concerns Outweigh Renewed IPO Activity

SONJA CHEUNG

Venture capital fundraising in China slumped to a two-year low in the second quarter as concerns about the country’s slowing economy outweighed renewed activity in initial public offerings, according to data from Dow Jones VentureSource. IPOs of Beijing-based e-commerce company LightInTheBoxHolding Co. in the U.S., and of car dealership China Harmony AutoHolding Ltd. in Hong Kong in early June, failed to reignite interest in those investing in mainland VC funds, despite proof that fund managers are finding it slightly easier to off-load investments.Instead, investors are far more concerned that the world’s second-largest economy is cooling. This would hinder the growth prospects of portfolio companies and subsequently affect how much return on investment a venture fund could make.

“The current situation in China isn’t as promising as expected, if you look at GDP and the short-term liquidity issues,” said Northern Light Venture Capital Managing Director Ray Yang. “The direction of economic reforms also isn’t that clear.”

China’s gross domestic product growth slowed to 7.5% in the second quarter on a year-over-year basis, inching down from 7.7% in the first quarter, as Premier Li Keqiang and his policy makers try to achieve more sustainable growth by promoting domestic demand and value-added exports.

At the same time, Chinese venture-capital fundraising dropped to $73 million in the three months leading up to June 30, compared with $790 million in the first quarter, according to VentureSource, which is owned by Dow Jones & Co., publisher of VentureWire.

The second quarter also floundered in contrast with a year earlier, which saw $250 million secured by venture firms, and was far below the $3.71 billion raised in the second quarter of 2011.

Although LightInTheBox, LITB -1.02% which counts GSR Ventures as one its investors, and BMW dealership China Harmony Auto 3836.HK -1.13% together raised $294 million via overseas IPOs, there have still been zero IPOs in China’s domestic public markets. IPOs are the main way for venture firms in China to exit their shareholdings in portfolio companies.

“The lack of exits makes limited partners nervous,” Mr. Yang said.

The amount of capital invested into companies also declined in the second quarter to $438 million via 47 deals, compared with $1.25 billion from 73 transactions in the same period a year earlier. First-quarter investment totaled $480 million across 37 deals, data show.

IDG Capital Partners, GGV Capital and DCM were the most active investors in Chinese companies in the second quarter. Deals in that period included a $20 million capital injection into biopharmaceuticals company Shenogen Pharma Group from investors including IDG and Lapam Venture, as well as a $30 million first round by consumer services company Youxin Hulian Co. sponsored by VCs including DCM, Bertelsmann Asia Investment and Legend Capital.

Health-care companies received the lion’s share of investment capital in the second quarter, with the sector raising $169 million from seven deals as popular demand for better health-care services and products boosts the industry. However, Mr. Yang said he believes health-care investments may “feel a pinch” in the very short term, as U.K. drug maker GlaxoSmithKline is being investigated for alleged bribery in China.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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