Venture capital investment in Chinse companies increased 55 percent in 2006, compared to 2005.
The level was at its highest point in three years, with 214 deals and $1.89 billion invested in 2006, according to a survey published by Dow Jones VentureOne and Ernst & Young.
Here are some of the survey’s findings:
–The fourth quarter showed gains over the same quarter a year ago, with 50 deals and $417.5 million invested, increases of 11 percent and three percent, respectively. However, the fourth quarter was the second slowest quarter of the year, similar to activity in the U.S. and Europe.
–While investment was up in the fourth quarter 2006 compared to the fourth quarter 2005, there was a slowdown in the fourth quarter compared to the third quarter, which VentureOne/Ernst & Young said may be attributed to the introduction of the new M&A rules in September 2006 or a similar seasonal trend in developed markets.
–While information technology remains the dominant industry for investment, the surve found that “there was significant investment growth in areas such as healthcare, business, consumer and retail companies and clean technologies. The continuous growth of the Chinese economy and the middle class in China • as well as the increased focus on innovation • are the primary drivers for the significant investment growth in these sectors.”
–By industry, 131 information technology companies were financed in 2006, receiving $920.7 million, an increase of 34 percent in capital from 2005. The most popular segment within the IT industry was the Internet-dominated information services segment, which attracted $464.6 million of that capital and 73 of the deals.
–The business, consumer and retail industry category, which is made up of non-technology focused innovative companies, posted 57 deals and $613.3 million in investment in 2006, which is 20 more deals and 40 percent more capital than in 2005.
–While healthcare is a relatively small investment industry in China, particularly in comparison to the U.S. and Europe, it did see 10 deals in 2006 and $47.5 million invested, up from six deals and $5.8 million in 2005.
–The energy segment also climbed with 10 deals, up from one in 2005, and $212.6 million invested, up from $80 million in the preceding year. But the largest deal of the fourth quarter and among the largest of the entire year was not in one of the traditional venture capital industries. It was for an advanced materials and chemical companyâ€”a $52 million second round for Cathay Biotechnology of Shanghai, a provider of dibasic acids production technology.
–The median deal size in China is now $5.9 million, up from $3.7 million in 2005, and the highest median in at least seven years, according to Stephen Harmston, Director of Global Research for VentureOne:
–Seed and first round deals continue to make up the majority of deal flow in China or 62 percdent, but that is down from 68 percent in 2005. As a result, deal flow to second and later rounds is increasing. Second rounds now make up 22 percent of the deal flow, up from 15 percent in 2005. In addition, 156 percent more capital was invested in second rounds in 2006 compared to 2005.
–For a second round deal, the median was $10 million, up from $7.5 million a year ago. This is larger than second round deals in the U.S. in 2006, where the median was $8.5 million.