VC/PE boom in China poses opportunities and risks

After 10 years of fast growth, venture capital (VC) and private equity (PE) funds are booming in China, posing growing opportunities and risks, top international VC/PE managers said Wednesday at the 6th China Venture Capital & Private Equity Forum here.


"Ten years ago, the VC and PE market (in China) was very small and limited, but today it has grown into a huge capital source for small and medium Chinese companies," Gavin Ni, founder and CEO of the leading Chinese VC/PE research firm Zero2IPO Group, told Xinhua.


According to Zero2IPO's data, the total VC/PE funds raised in China last year hit a record of 30 billion U.S. dollars, half of which were successfully injected into 1,200 companies from various industries. Among 776 Chinese companies that went to initial public offering last year, 221 were financed by VC/PE.


"Back in 2005, when Carlyle Group attempted to merge with Chinese manufacturer Xu Gong, a broad discussion was aroused in China. People knew little about PE funds at that time. Due to lack of knowledge, the Chinese refused to accept any capital from PE," Yale finance professor Chen Zhiwu said. "But now, almost every person I meet is talking about VC or PE. Such a big change in 6 years."


The market is still expanding. In the first quarter of this year, China's private equity funds have raised another 12 billion dollars. "It is the fastest pace," Ni said.


However, a big market with booming VC/PE funds inevitably carries the risk of a bubble. Yet how great the risk is remains debatable.


Ni saw no bubble at present. "There are more funds, which makes the competition more fierce. That is a challenge, because every fund wants to find the best investment choice. But that is not a bubble," Ni said, noting that the gross domestic product (GDP) ratio of total VC/PE funds is now 0.2 to 0.3 percent in China, far below the 2 or 3 percent in many developed countries.


"We still have a long way to go. The development space remains huge," Ni said confidently.


On the contrary, Chen believed there is a threat. He acknowledged the positive role that VC/PE has played in financing small- and medium-sized companies and in stimulating innovation. "But there are now so many funds in the market, and they still keep growing in an unhealthy way," Chen said.


The quantitative easing policy in the United States has created a lot of liquidity, making it easy for funds to raise money, he argued. "Some funds pick up investment objects in a reckless way, reducing the capital efficiency. So bad funds would drive out the good ones," the finance professor said.


However, he did not think more regulations are a good idea, but was in favor of maintaining a market-oriented status instead.


At the forum, most participants agreed that China's fast economic growth offers good investment opportunities and high profit for VCs and PEs.


David Munoz, managing director in BlackRock's Portfolio Management Group, said that many industries in China are worth investing in. As Chinese are becoming wealthier and the central government is focusing on boosting the domestic consumption market, all consumer-related companies should be paid more attention to, he said.


Projects intended to dampen the inflation rate are worth investing in, such as clean energy, the mobile industry and healthcare, since the inflation rate has become a focus for all policy-makers in China, Munoz said.


As a foreign manager, Munoz also sees the risk of cultural differences. "In the U.S., the business connection is more important, but in China, the political connection is much more important," he said.


Zero2IPO Group has been the major organizer of the forum, which was first held in Silicon Valley in 2006.
(Source:http://news.xinhuanet.com)