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Michael Logan

The mainland maker of image-signal processors seemed promising to Vincent Chan, executive vice-president at venture-capital firm Jafco Investment. But there was just one problem: the company was demanding too high a price in exchange for an equity stake.

The firm, which Mr Chan did not identify, had just one-third the sales of a South Korean counterpart but wanted a similar valuation.

'It's because China is hot. There's a China premium,'  he said. 'When the market is very hot, investees ask for high valuations.'

While Jafco passed on the investment, Mr Chan said the company  probably  got its price as venture-capital firms (VCs) and private equity investors flooded into China.

According to the Centre for Asia Private Equity Research, US$1.55 billion was invested in Hong Kong and the mainland last year, up from $664.1 million in 2002. In the first quarter of this year, roughly $232 million had been invested.

There is also plenty of anecdotal evidence to suggest China fever is re-emerging in the venture-capital sector. A flood of technology companies such as Shanda Interactive Entertainment and Mtone Wireless are lining up for initial public offerings (IPOs), giving VCs a chance to exit investments and replenish funds for new deployments.

In addition, several companies  that have fully invested their funds plan to raise additional money this year. What is more, the overall business environment has changed. Internet firms  that were long on promise but short on profits at the height of the investment bubble in 2000 have since matured.

'These businesses were not making money two years ago. They're wildly profitable [now],' Latitude Capital managing director Frank Au said.

Alfredo Lobo, also managing director at Latitude, added: 'After a painful two or three years, investors are willing to deploy money again.'

Mr Chan said Jafco anticipated making five to six additional investments in China this year. The company's US$178 million Asia fund already has 12 on the mainland in firms such as Powercom - a provider of radio frequency modules - and China Wireless, which makes wireless equipment. Both are tipped to go public this year.

Powercom has yet to select an underwriter, while China Wireless is said to be eyeing a US$10 million to $15 million offer on the Growth Enterprise Market, with DBS as the sponsor.

Mr Chan predicted this year would be a better one for exiting investments. 'What should we do in 2004? We should sell whatever we can.'

He also said VCs would begin to focus more on promising companies with little or no revenue as competition among investors pushed up valuations for later-stage investments. 'The only way is to go back to early stage,' he said.

Jafco planned to raise  a further US$100 million by the end of the year, of which about one-third would be deployed in China.

Another VC with plans to raise additional money is AsiaTech Ventures, which has deployed all but US$5 million of its $200 million in funds.

Managing partner Hanson Cheah said the company hoped to collect US$80 million to $100 million, and the job was made easier by the brightening investment mood, although investors were not simply giving money away as during the dotcom mania.

'It's easier than in 2000 and more difficult than in 1997,' he said.

Mr Cheah said he had noticed VCs from outside the region beginning to return to Asia, and new companies were setting up shop for the first time.

'VCs that previously wouldn't invest more than 60km  from their homes are now taking flights to Shanghai,' he said.

Earlier this month, private equity house Carlyle Group opened a Shanghai office and said it planned to invest US$1 billion in China over the next 18 months. Meanwhile, small players such as Colony Capital have also established a China presence.

In addition to IPOs, industry players this year expect a greater number of 'trade sales', in which a company is sold to another industry player.

For example, AsiaTech had a stake in EachNet, which was sold to eBay for US$180 million last year. These deals are important to VCs because it provides a way to exit investments, in addition to IPOs.

Mr Chan said it was easier for foreign players to acquire a Chinese company instead of investing years to build a mainland operation from scratch.

'It's better for them to spend US$100 million to  $200 million to buy a major market leader,' he said.

One foreign company  that could make a mainland acquisition is internet search giant Google, which on Thursday filed for a US$2.71 billion IPO. Part of the proceeds will be used for acquisitions. International sales account for just 26 per cent of revenue, yet roughly half its users are outside the United States.

Mr Au said Latitude, which also does advisory work in addition to managing US$78 million in Asian investments, said a greater number of foreign companies was seeking its help in finding mainland acquisitions.

About 40 per cent of its inquiries today were on the 'buy side', or companies looking for Chinese investment candidates. A few years ago, there were none: its advisory work consisted primarily of 'sale side' business of helping mainland companies  raise capital.

'That's probably a good indicator that the market is changing,' Mr Au said.

'We've got people willing to commit dollars. Two years ago, it was all capital-raising situations.'



Venture capitalists catch China fever