China's venture capitalists having record year

PUBLISHED : Thursday, 09 December, 2010, 12:00am
UPDATED : Thursday, 09 December, 2010, 12:00am

Drawn by the start-up board in Shenzhen and the increasing popularity of yuan-denominated funds, venture capitalists this year have launched a record number of funds for investment in mainland companies.

According to venture capital consultancy Zero2IPO, a record 148 funds launched in the first 11 months of this year raised a combined US$10.1 billion, 137 of which were yuan-denominated funds.

The high listing prices on the ChiNext market, China's Nasdaq-style second board established in October last year, resulted in a fund-raising frenzy, the consultancy said.

Venture capital funds conducted 707 investment deals this year, 48 per cent more than last year, Zero2IPO said.

Based on the investment amounts made public by 582 firms, they received a combined US$4.45 billion from venture capitalists.

'Yuan-denominated funds took a bold leap forward, writing a new record in the history of China's venture capital industry,' said Zero2IPO chief executive Gavin Ni. 'But it is advisable for the funds to gain an insight into their most unsuccessful deals in the past so that they can better understand market turbulence.'

Fund managers warn that the bullish sentiment surrounding the ChiNext market will prove temporary because the stock prices will eventually return to reasonable levels.

Beijing launched the board in the Shenzhen exchange after nearly a decade of delay, and investors have flocked to what they believe are the future stars.

The companies listed on the second board have offered shares at high prices - on an average 70 times their earnings - bringing venture capitalists handsome returns.

Home-grown venture capital firms such as Shenzhen Capital Group and Fortune Venture Capital were among the top beneficiaries of the birth of ChiNext since they had been investing in domestic start-ups for years before the official launch.

Big-name foreign venture capital firms including KPCB and IDG Capital have also launched yuan-denominated funds.

Existing regulations mean that a company that receives offshore funds in foreign currencies is unlikely to secure a regulatory approval to float shares on the ChiNext market.

Admitting that yuan-denominated funds still have a lot of untapped potential, Zhang Suyang, a general partner of IDG Capital, said the current high valuations on the mainland market would turn out to be short-lived. 'Eventually prices will return to normal levels.'

Venture capital funds exited in 285 IPO deals in the first 11 months, Zero2IPO said.

The IPO bonanza on the start-up board also attracted giant funds such as the nation's pension fund that recently mandated 300 million yuan to Legend Capital for management.