Private equity, venture capital firms scent rich pickings in China despite market turbulence

Once the darlings of the Chinese economic miracle, private equity and venture capital funds are gasping for breath as the global economic slowdown is fast changing the industry landscape and queering the pitch for long-term prospects.

Though most of the industry experts expect a shakeout, indications are that there are still enough pickings in the market for companies with the right investment priorities.

Part of the reason why most of the experts had a bearish outlook for the industry in 2013 came from the 2012 performance report of the PE and VC industry prepared by the Beijing-based Zero2IPO Group, a PE company that has researched the sector for more than 10 years.

In its report, Zero2IPO said that though 369 PE funds were launched last year, compared with 235 in 2011, the amount raised by the 359 companies that disclosed the information declined by 35 percent to $25.3 billion (19 billion euros) compared with $38.9 billion in 2011.

Only 252 VC funds were set up in 2012, a 34 percent decline from 2011, and these funds together raised $9.3 billion, down 67 percent from the previous year. The new VC funds on average raised $37.7 million during the year, the lowest since 2005.

At the same time, there were clear indications that PE and VC firms are indeed aware of the bumpy road ahead and taking corrective action to stay in the game.

Some of these strategies include focusing more on early and growth stage investment programs, and providing more value-added services to the invested companies. Some others are also adopting a more mixed portfolio of investment strategies such as mergers and acquisitions to unlock the full potential of their investments.

Having said that, the one thing that still remains hazy is the fine line between private equity and venture capital. Venture capital tends to be mostly early-stage financing for start-up businesses, with deals often ranging from a few million dollars to $50 million.

Private equity or PE, on the other hand, has $50 million as its investment threshold and most of the deals often involve substantial sums for the ambitious expansion plans of established businesses. Most of the PE investors normally seek an exit option after three to five years through an initial public offering on one of the global stock exchanges, mergers and acquisitions or other exit channels.

However, there are also instances of private equity companies seeking longer-term investments of 10 years in some of the ventures funded by them.

Liu Zhou, the founder and managing director of Fortune Capital, a Shenzhen-based equity investment company, admits that the heyday of the PE and VC industry has long since passed and there are no longer that many profitable investment options for investors.

As the leader of one of the first Chinese companies in the PE and VC market, Liu has tasted the sweetness of the fast growth in the industry.

Since its inception in 2000, the company has so far invested 11 billion yuan ($1.8 billion; 1.3 billion euros) across 180 companies, and exited 37 of these ventures.

Although his company was listed as the best performer in the China Venture Capital Annual Ranking for its good IPO performance in 2012 by the Zero2IPO Group, and conferred with titles like "Best Venture Capital Firm of the Year 2012" and "Best VC Exit Winner of the Year 2012", Liu still holds a pessimistic view on the market.

"The PE and VC industry is strongly affected by and closely connected to the overall macroeconomic environment. Due to the slower economic growth in China, many PE and VC companies may become bankrupt, while the industry will see another round of consolidation," Liu says.

Admitting that the situation is indeed grave, Liu, an industry veteran of more than 10 years, says that many ailing PE firms have come to him recently for bailouts through the M&A route.