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China’s Booming Private Equity Market Helps Venture Capital


January 19, 2015

The Chinese private equity and hedge fund industry has been growing rapidly in the past few years. The news broke out on Thursday that the Chinese government has announced yet another big development, as it outlined the start of a new government venture capital fund. The hope is the fund will help aid start-ups in emerging markets and help the private sector grow further.


Government’s Plan
The government is looking to establish a venture capital fund by raising nearly $6.5 billion (around 40 billion yen), according to the reports. The Financial Times reported that the fund is part of a broader government effort to rid the economy off “dependency on fixed asset investment in infrastructure and property”.


The focus of the fund is to support start-ups in emerging markets and help the private sector foster and innovate. The Chinese State Council said in a statement, “The establishment of the state venture capital investment guidance fund, with the focus to support fledging start-ups in emerging industries, is a significant step for the combination of technology and the market, innovations and manufacturing”.


The statement, published on the government’s website late Wednesday night, went on to state the fund “will also help breed and foster sunrise industries for the future and promote (China’s) economy to evolve towards the medium and high ends”.


According to the outline, the fund will mainly be funded through existing government capital, although private partners will also be invited to participate in the fund. The returns will give priority to these private investors.


Rapidly Growing Market
The venture capital market, like the private equity sector, is growing rapidly, although it still remains relatively small by some standards. According to Reuters this is mainly caused by the long history of planned economy in China, with the private sector development having to deal with a number of restrictions and regulations.


Yet the venture capital market is growing. Reuters cited data by Zero21PO Capital, which is a service provider and investment institution in China, which shows that in the first half of last year, China’s venture capital market saw the birth of 83 new funds. This was a 157% increase to capital available for investment in the country compared to previous year’s performance.


Furthermore, during the first part of 2014, 517 investment deals took place in the market, with the combined investment capital standing at $5.3 billion.


Yet some analysts point out that the total venture capital market remains relatively small. In 2014, the capital available for investment stood at a total of $6.76 billion. Data by another consultancy firm, Z-Ben Advisors, shows that the country has now over 3,100 hedge funds, with 2,500 private equity managers overseeing funds over $193 billion (around 1.2 trillion yen). This is a big climb compared to numbers a few years back.


The Chinese technology company Xiaomi Corporation laid down one of the best fundraising efforts last year. The company raised over $1 billion in the fourth quarter, giving the company a valuation of $45 billion, according to Business Day Online.


Changing the Scene
The Chinese government has had to start looking more towards the private sector, as economic growth is set to slow down. This has opened up more doors for private equity as well as venture capital. The big shift started two years ago when the government created a strategy to allow the market forces a bigger role in shaping the Chinese economy. Reuters reported how just last month the “regulators issues new rules to allow insurance companies to invest their huge pool of premiums in venture capital funds for the first time”.


But analysts are pointing out that much of the success of the fund depends on the way the government will implement it. Huang Weiping, an economics professor at Renmin University in Beijing, told the Financial Times that, “If the state just ends up funding its own scientific research projects then it won’t be very interesting,” but the fund can manage to improve the venture capital market “if they really do compete in the market and private companies benefit from it”.


The government is also trying to tackle the problem of slow growth by unleashing more economic stimulus. The share prices have seen sudden increases in recent days, as the expectations of a further stimulus have grown globally, although analysts disagree on the usefulness of another stimulus.

Increasing Buyout Volumes
Furthermore, the latest Preqin data shows, the restructuring process in Chinese firms largely drove the region’s strong growth. The volume of private equity deals with Asian firms increased to total $41.6 billion in 2014. The most impressive aspect was that the total volume rose by 68%, when the same growth in Europe was only 16% and in the US, the volume went down by 8.6%.


Sebastien Lamy, a private equity specialist at Bain & Co., told Bloomberg, “China’s large state-owned enterprises are undergoing restructuring and that’s making them attractive for buyout firms, which also have more money available to put to work.”


Some of the biggest deals included the sale of 20.98% stake in China Huarong Asset management Co., the biggest bad-loan manager in the country. The company is currently undergoing further restructuring as it is preparing for an initial public offering.


Chinese companies are becoming increasingly private and together with more open regulatory market, the country is set to continue growing its private equity and venture capital sector. It is yet unknown when the newest government venture capital fund will start investing. According to many experts, Chinese government tends to work quickly on these issues and it could be just a matter of few weeks before the fund is officially set up.


The Chinese economy is undergoing a big change, as the government has to find ways to tackle the problem of slowing economic growth. But many investors still look to China as a lucrative market and the strengthening private markets are offering plenty of opportunities for private equity and venture capital investors and funds.

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