A private equity (PE) fund presents its products at a recent financial exhibition held in Beijing. China's PE sector enjoyed a rebound in the third quarter. CFP

China's private equity (PE) fundraising and investments rebounded in the third quarter, with renminbi funds leading the trend, according to a new report from Zero2IPO, a Beijing-based company specializing in venture capital and PE research, consultation and investment.

According to the company's "Chinese PE Report Q3 2009", six PE funds available for investment in Asia collected $2.47 billion.

Meanwhile, the third quarter witnessed 20 enterprises on the Chinese mainland garner PE investments, among which 16 disclosed a total investment of $982.92 million.

In terms of exits, seven deals took place in the third quarter, among which four ended up with the listing of investors.

The amount of newly raised funds is on the increase with renminbi funds taking the lead, according to the report.

The research results from Zero2IPO Research Center showed that newly raised PE funds targeting the Asian market rose continuously in the third quarter.

During the period, there were six PE funds available for investment on the Chinese mainland fulfilling fundraising for $2.47 billion -- significantly down by 86.8 percent year-on-year.

In this case, although the gross amount of newly raised funds slightly increased quarter-on-quarter, the funds still faced difficulties. This also clearly mirrored the changes in the PE upstream supply chain.

Magnet for investors

The reasons behind the phenomenon are as follows:

First, the booming PE market became a magnet for investors, while general partner-invested enterprises showed vulnerability after the outbreak of the global financial crisis.

Second, the funds raised in 2008 failed to fully make investments, due to an industry recession and general partner investment slowdown. In the third quarter, five growth funds completed fundraising for $270.86 million, accounting for 83.3 percent of the total amount of funds.

The number of growth funds in the third quarter increased compared with that in the second quarter, while the amount raised dropped a dramatic 84.5 percent.

There was another buyout fund worth $2.2 billion completed in the quarter, constituting 89 percent of the total fundraising amount in the third quarter.

In terms of currency, all of the six PE funds targeting the Asian market, including China, were renminbi funds for the first time, which further supports the research results of Zero2IPO Research Center on the development trend of renminbi PE funds in recent years.

Renminbi funds

Along with the funding injected into China's multi-layer capital market, renminbi funds on the Chinese PE market are apparently ready to become more developed.

China's Social Security Fund had called for enlarging its investment in PE funds, and the China Securities Regulatory Commission lowered the access threshold for stockbrokers' direct investment in the second quarter.

Then local governments, headed by Shanghai and Beijing municipal governments, constantly created new policies and gradually removed the policy barriers in the foundation of renminbi funds in China. This, in turn, incurred another round of upsurges in the fundraising of renminbi funds.

Moreover, there were no US dollar funds raised in the third quarter, because more general partners delayed fundraising and more funds were discarded due to the persistent depression of the global economy.

PE funds worldwide

According to Preqin, a world-famous research institution, the third quarter saw a sharp drop of 55 percent in the aggregate fundraising amount of PE funds worldwide compared with that in the preceding quarter, staying at the lowest level since 2003.

PE investments steadily increased in gross amount with traditional industry accounting for a bigger proportion of investments, according to reports.

From the perspective of investments, the third quarter saw 20 investment deals completed on the Chinese mainland with $982.92 million.

The number of investment deals declined 31 percent from 29 in the third quarter of 2008 and climbed 53.8 percent from 13 in the second quarter of 2009.

The funding invested also dropped 62.2 percent compared with $2.6 billion in the third quarter of 2008, and soared 42.7 percent from $689 million (excluding one mega deal) in the second quarter.

Traditional industry

By industry breakdown, there were 14 PE investment deals in traditional industry sectors with $877.22 million disclosed, accounting for 70 percent and 89.2 percent of the total numbers and amounts of investment, respectively, in the third quarter.

Traditional industry sectors experienced a significant increase in both the numbers (up 53.8 percent) and amounts (7 percent) of PE investment in the previous quarter.

Broad IT claimed two investment deals worth $48 million in the quarter, exceeding services to take second place.

Against the backdrop of the launch of 3G and the growth enterprise market, PE funds that had ignored broad IT seemed to have expanded in scope to industries with potential such as broad IT.

In the third quarter, there was only one deal priced at $35 million in services. Other industries attracted very small investments.

(China Daily 11/02/2009 page4)