(Editor’s note: Mark R. Williams is a partner in the Corporate and Securities group of law firm DLA Piper and has worked on numerous transactions in China and Asia. He submitted this column to VentureBeat.)
The venture capital markets have been coming of age in China for the last decade, but the global economic downturn has gummed things up over the past two years. If the back half of 2009 is any indicator, though, a rebound could be on the way.
During the past several years, China has gradually become one of the most attractive investment markets in the world, largely due to the diversification of industries, the relative cost base and the tremendously increased domestic market – but it’s not immune from the financial crisis. The credit crunch and stock market problems led to a decrease in the flow of foreign investment capital into the country in 2008 and the first quarter of 2009.
But when the second quarter of ’09 hit, things began to rebound.
A little history: During the first quarter of 2009, the number of venture deals was 53, about one-third of the 153 deals reported during the same period in 2008, according to Zero2IPO, a marketing and research firm. The number of private equity deals stood at 19, less than half of the 41 that were struck during the first quarter of 2008. The value of the deals in venture and private equity also declined. Fundraising for new pools of investment capital dropped to about $889 million in the first quarter, versus $2.27 billion during the same quarter in 2008.
However, in the second quarter of ’09, 17 funds were established – an increase of seven from the previous year. Newly added capital available for investment in China’s mainland totaled $1.37 billion, a 53.8 percent from the previous quarter. Things kept growing in the third quarter. Eighteen funds were established by Chinese and foreign venture capital companies – and investment capital held relatively steady at $1.26 billion.
Traditional industries – such as construction, hotel and leisure and retail – along with the broad IT industry remain the most attractive to investors. But others, including outdoor media, green technology and innovations and healthcare – are growing fast. Clean technology innovation is especially popular as the country rigorously explores solar power generation, new materials and clean production, seeking to ameliorate its water and air pollution.
China’s impressive economic growth amid the worldwide downturn definitely helped support the quick recovery of investment volume. Analysts estimate the country’s economy grew by more than 9 percent in 2009. In addition, the huge population and expanding middle class continues to contribute to consumer-driven businesses.
Just as in the U.S., though, many investment firms may hold onto their assets to better support their existing portfolio companies, rather than seeking out new opportunities.
Of course, no one knows how China’s VC and private equity markets will ultimately fare. Some investors believe returns from VC and private equity exits will decline as a result of market volatility and uncertainty. Others see an opportunity – with good companies turning to venture capital and private equity sources so they might grow in the still relatively dynamic Chinese economy.
Sarah Wang and Cathy C. Yu, associates at DLA Piper, assisted in the preparation of this article.