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Venture Capital Rebound Sees Market More Than Double
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China's venture capital (VC) market more than doubled in the first half of this year, pointing to a significant rebound according to a market analyst.

VC investment in the country hit US$772 million during the first six months of this year, an increase of 128 percent year-on-year, said Beijing-based professional VC consulting firm Zero2ipo.com Ltd yesterday.

The number of VC deals clinched rose 49 percent year-on-year to 121 during the period.

"That signals venture capitalists' increasing confidence in the Chinese market," said Garvin Ni, president of Zero2ipo.

"We expect the VC market to grow even stronger in the second half of this year as venture capitalists are usually less active in the first half, focusing on project planning and studying."

China's booming information technology (IT) sector remains the focus for VC investment.

In the first half of this year, about US$562 million of VC investment was absorbed by the country's IT industry, accounting for 73 percent of the total.

The Internet sector secured US$276 million in VC investment.

More than 13 percent of VC investment in the country was made in the service industry, while 10 percent was made in traditional industries.

Foreign companies continued to dominate the VC market, pouring in 70 percent of the US$772 million in the first half of this year. Domestic companies invested 16 percent of the total. The rest was jointly invested by foreign and domestic firms.

But the number of domestic VC firms in the market is increasing.

Chen Hao, managing director of Legend Capital Ltd, said his firm had closed its investment in two funds and 40 projects.

"We are investing in the third fund and exiting from seven to eight projects," Chen revealed at the China Venture Capital Semi-Annual Forum 2006 yesterday.

Legend Capital Ltd is controlled by Legend Holdings Ltd, the parent company of China's top PC-maker Lenovo Group.

Ni said there might be a VC bubble, but the market is not yet overheated as China's national economy is still on a fast track and start-ups are thirsty for capital to boost business growth.

"But the competition between VC firms is intensifying," Ni said.

In China, 29 million small- and medium-sized enterprises (SMEs), which employ less than 500 people and generate annual revenue of US$300 million, contribute 55 percent of the country's gross domestic product (GDP).

According to a government survey of 270,000 SMEs, 78 percent of such businesses are profitable. And their revenue and profit grew by 26 percent and 36 percent respectively in the 2001-04 period.

"Such high growth rates mean that China's SMEs are in acute demand of cash," said Kathy Xu, managing partner of Capital Today.

Yet IT firms, especially Internet companies, are beginning to lose their lustre as the industries mature, she said.

"We need to make more effort to look for promising companies in the traditional industries."

In the first half of this year, 13 Chinese mainland firms, supported by VCs or private equity funds, successfully launched initial public offerings (IPOs) on domestic or overseas stock markets and raised a total of US$11.76 billion.

Ni said the environment for exit channels for VCs has been improving. "So far, it's still the top priority of VC firms to exit by helping launch the IPOs of the companies (they invested in)."

Ni predicted total VC investment in China could exceed US$1.5 billion this year, and said China's private equity market still promises much untapped potential.

According to Zero2ipo, 17 private equity funds raised US$4.631 billion in the first half of this year and invested in 31 projects in China with US$5.559 billion.

Zero2ipo estimated that private equity investment in China accounts for 0.5 percent of the country's GDP. For Western countries, the average figure stands at 4 to 5 percent. "That means the private equity market promises huge potential," said Ni.

(China Daily July 13, 2006)

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