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VC, PE sector faces cold winter in China: experts

By Geng Wenxin (Global Times)

08:12, June 07, 2012

The venture capital (VC) and private equity (PE) investment industry is experiencing a cold winter in China, experts said yesterday, largely as a result of the slowing down of the economy and the government's tightened supervision of the sector.

There are too many VC/PE capital firms competing for too few quality projects, Lu Dongcheng, partner of VC firm Jiangtong Capital, told a VC/PE forum in Beijing yesterday.

"China is facing some difficulties in economic development now. This is reflected in investment circles as there are fewer quality projects to invest in, and sources of investment capital are drying up," Wang Jian, manager of Shanghai-based venture capital firm Gobi Partners, told the Global Times.

A decreasing number of companies with stable and good performance has forced investors to take on more risks by investing in less healthy enterprises.

PE investors in China, who usually prefer mature projects with fewer risks such as pre-IPO projects, have to invest in smaller companies as venture capitalists, while the venture capitalists now behave like angel investors, who have to find valuable early startups, Wang said.

"This means it takes a longer period to get the investment back."

The government has been tightening the supervision of PE firms since 2011, and the National Development and Reform Commission (NDRC) has started to crack down on illegal fundraising in the PE industry.

In November 2011, the NDRC stipulated that all PE partnerships must register with it, and it set a minimum contribution from each limited partner at 100 million yuan ($15.71 million), Luo Xinhui, a lawyer at Beijing Xiang Lian Law Firm, told the Global Times yesterday.

"As monetary policies have been tightened up, limited partners are facing financial pressure. Many of them have reduced their assets in PE investment companies. It's likely that a lot of PE companies will have little money to invest," Luo said.

Also, the government's strict control of new stock market listings will narrow the channels for VC/PE investors in terms of getting their investment back, Luo noted.

However, some believe there are still opportunities in the sector.

"Many assets in the secondary market are much cheaper than before. The Chinese economy is still strong compared with some other economies, like those in Europe. There are also investment opportunities in emerging sectors like TMT (technology, media and telecoms) and biological medicine," Zhang Jialei, a partner at Shenzhen-based venture capital firm Wan Xiang Capital, told the Global Times.

"But investing in these types of projects requires deep knowledge and professionalism," Zhang cautioned.

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