VENTURE CAPITAL INVESTMENT SLOWS IN CHINA

Venture capital investment in mainland Chinese companies declined significantly in the first six months of the year, the latest sign of weakening economic outlook in the world’s second-largest economy.

According to Dow Jones VentureSource, which tracks venture-backed companies, the value of venture capital investments in Chinese companies was US$1.9 billion in the six months through June, down 43% from the same period last year. The number of deals declined 38% to 103. Each deal represents a single case of investment by a professional venture capital firm, corporation, private equity firm or individual.

Commenting on the decline, Guido Schenk, APAC and EMEA sales director for Dow Jones VentureSource, said: “Venture capital firms are being more selective in considering their China investments, particularly given the uncertain macroeconomic landscape and challenging exit environment. Until IPO and M&A activity in China pick up, we’re unlikely to see a jump in venture capital investment.”

In the six months ending June, venture capital exits in China by IPO declined 42% to 32 cases. Venture capital firms exited only three China investments by M&A, far less than the 208 exits by M&A or buyout in the U.S. and the 68 exits by M&A or buyout in Europe during the same period.

Median Investment Values Remain Robust

Despite the slide in total investment volume and value, the median invested amount for the half year remained relatively robust at US$11.5 million, only slightly below the same period in 2011.

“The robust median value demonstrates that investors remain confident about opportunities in China and have not cut back on deal sizes,” said Mr. Schenk.

Investment Declines in Most Industry Groups

The largest investment declines were in consumer services and industrial goods.

Investment in consumer services, which is largely driven by consumer internet companies, fell 51% to US$908 million invested in 47 deals.

Industrial goods and materials makers saw a decline of 86% to US$29 million across three deals in the six months through June.

Information technology (IT) investment declined 42% to US$342 million invested in 22 deals across the first half of 2012. Investment declines hit all IT sub-sectors, including communications and networking, electronics and computer hardware, semiconductors and software.

Healthcare investment declined 71% to US$61 million for seven deals in the half year due to smaller investments in biopharmaceutical companies (down 85% to US$24 million) and medical device and equipment manufacturers (down 65% to US$12 million).

Investment in business and financial services totaled US$233 million across 13 deals in the first half of the year. Although the number of deals declined 48%, the investment value fell just 2% year on year, reflecting continued interest in attractive investment opportunities in China’s financial services institutions and business support services providers.

Industries recording year-on-year growth included energy and utilities, at US$41 million invested across three deals, as well as consumer goods, comprising makers of automotive parts, food and beverages, and personal goods such as clothing, which collectively attracted US$307 million across eight deals, up 36% year on year.

China Decline Sharper than Other Markets

The overall investment decline in China was sharper than that seen in other major investment destinations worldwide.

During the same period, venture capital investment in the U.S. totaled $15.3 billion for 1,595 deals, a decline of 7% in capital and 5% in deals from the same period in 2011.

In Europe, through the first six months of this year, venture capital investment totaled €2.2 billion for 550 deals, a 7% decline in capital and 10% decline in deals from same period last year. The U.K. accounted for 37% of this total investment value, at €811 million. Germany’s €302 million, accounting for 14% of investment, increased 8% from the same period last year, while France’s €348 million was relatively flat with a modest 1% decline.