PE, VC firms face battle for 'survival of fittest'

With the IPO exit return rate falling below two times, a chill has set in for China's venture capital and private equity sectors, which face a shake-out, analysts said.

Last month, 20 Chinese companies were listed, nine of them backed by a total of 16 VC and PE firms. But more than half of the exit return rates were less than two times, according to Beijing-based consultancy Zero2IPO Group.

The consultancy added that because most investment deals involving the VC and PE firms in the nine companies were at the pre-IPO stage, their investment periods were only about two years and exit return rates were low.

The average IPO exit return rate for 21 VC and PE firms from 10 companies listed in April was 2.76 times.

Chen Changzhi, vice-chairman of the Standing Committee of the National People's Congress, was quoted by the Yangcheng Evening News as saying at a forum held in Shenzhen: "The Chinese VC and PE industry will experience a miserable reshuffle process".

The newspaper also quoted Gu Shengzu, a member of the National People's Congress Standing Committee, as saying that the "VC and PE industry in China will be reshuffled soon".

According to Gu, early-stage investments can achieve higher return rates than pre-IPO ones, so VC and PE firms should seek opportunities in earlier-stage companies rather than pre-IPO deals.

Shan Xiangshuang, chairman of the board of China Science and Merchants Capital Management Ltd, a leading Chinese PE firm, said 90 percent of Chinese VC and PE companies will die in five years and among the survivors, fewer than 1 percent will be strong.

Shan added that the outlook for VC and PE firms also reflects the situation in the Chinese and global economies.

China had some 10,000-plus VC and PE firms at the end of last year managing nearly 2 trillion yuan ($313.9 billion) in total assets, according to Liu Jianjun, director of the financial affairs division of the National Development and Reform Commission's Department of Fiscal and Financial Affairs.

Shan said VC and PE firms should develop their strengths in providing value-added services by striving to create industry, capital and talent networks.

In the first quarter, 28 PE funds that can invest in the Chinese market raised about $2.95 billion, less than 25 percent of the year-earlier level and down 6.8 percent from the fourth quarter.

As for venture capital, 29 funds raised money investable in China of $958 million in the first quarter, down 83.8 percent year-on-year.

Dai Xianglong, chairman of the National Council for Social Security Fund, China's largest limited partner, said previously that the fund selects VC and PE firms with good investment records, a steady investment pace and the ability to offer value-added services.

As of the end of last year, the council had 868.8 billion yuan in funds under management. Under the rules governing its activity, the council may invest up to 10 percent of the social security fund in VC and PE activity. The ratio at the end of last year was only 2.2 percent.

Dai said the council's investment in VC and PE firms will total 30 billion yuan by the end of this year and 50 billion yuan by the end of 2013.

Although fundraising this year is difficult, Dai said total assets managed by Chinese VC and PE won't be much less than public offering funds because there is a wealth of private capital in China available for qualified VC and PE firms.

By the end of last year, the scale of 914 public offering funds managed by 66 fund management companies totaled 2.17 trillion yuan, according to statistics of TX Investment Consulting Co Ltd.

caixiao@chinadaily.com.cn