Zero2IPO Research Center, a well-known venture capital and PE research institution in the Greater China, recently released data for China’s PE investment market during January-November 2011. It shows that, a total of 204 PE investment funds closed their financing during the first 11 months in 2011, and 195 of them with the fundraising amount disclosed have totally raised USD 33.58B, exceeding the total amount of 2010. Of them, RMB-denominated funds went beyond their foreign currency counterparts in both the number and fundraising amount, displaying a remarkable year-on-year growth. Meanwhile, investment activities were also brisk in China's PE market. From January to November, totally 654 investment deals were closed, 610 of which disclosed a total investment amount of USD 23.81B. Their investment strategies were highly diversified. Besides growth capital investment, the investments adopting other strategies accounted for up to 15.9%, with their total amount taking up 41.9%. As for geographical distribution, China’s central and western areas achieved an eye-catching performance marked by especially active investments in Jan-Nov 2011. Although fundraising and investment activities surged up, the number of exits edged down. During the first 11 months of 2011, there were 123 PE funds exiting from their invested enterprises, a decrease of 10.9% compared with the same period in 2010. Additionally, the downward average book ROI multiples also indicated the great pressure imposed on domestic and foreign PE institutions in exiting.
Number of New PE Funds Hits New high; Average Scale of New Funds Falls down to the Bottom
During January-November 2011, a total of 204 PE funds closed their financing, 2.49 times of that in the full year 2010. Among them, 195 funds with the fundraising amount disclosed have raised USD 33.58B. It was worth noting that, however, in January-November 2011, the sizes of new funds have shrunk to the lowest level since 2006 along with reducing liquidity, increasing institutional financing difficulty and slow growth in fund size. In respect of institution type, 177 of the 204 funds were domestic institutions with their fundraising amounting totaling USD 21.34B, 25 funds launched by foreign institutions saw a total financing amount of US$11.95B, and the remaining two funds set up by joint ventures have totally raised US$292.00M.
By fund type, funds that completed financing from January to November 2011 were in various kinds. Of them, growth funds took the majority as evidenced by the fact that a total of 174 growth funds raised USD 28.85B, taking up 85.3% and 85.9% of the total number and involved amount of fundraising respectively. Meanwhile, PE real estate funds highlighted financing deals in 2011. To be specific, 26 funds raised totally USD 3.64B but with a small average amount of merely USD 140.08M and a year-on-year drop of 24.6% compared with 2010. Besides, two mezzanine funds were closed with a total financing amount of USD 441.00M in place, while one buyout fund and one distressed debt fund were completely raised in the first 11 months of 2011.
RMB-denominated funds closed in January-November 2011 went beyond those foreign currency ones in terms of either the number or fundraising amount. In the first 11 months of 2011, a total of 180 funds were raised in place, 2.43 times of that in the same period of 2010. Of them, 171 funds with the amount disclosed have raised USD 20.23B in total, 2.03 times of that in the first 11 months of 2010; 24 foreign currency funds raised USD 13.35B, with the number growing by 1.40 times and the fundraising amount shrinking by 18.8%.
Investment Deals Set Record High; Non-growth-capital Investments Account for A Big Chunk
Along with the booming number of fundraising activities, investment deals were also thriving in China’s PE market in 2011 with new records set in terms of both the number and investment amount. From January to November, there were 654 investment deals closed in the first 11 months of 2011, a 0.80-fold increase compared with the full year 2010. As block trading like the M&A of Capsugel by KKR for US$2.40B was included, the 610 deals with disclosed investment amount made a total investment up of US$23.81B, 2.29 times of that of the full year 2010. From the viewpoint of investment size, there were totally 45 deals with an investment amount exceeding US$100.00M, accounting for 6.9% of the total, and their investment amount totaled US$1.38M, taking up 57.9% of the total. Being pulled up by block trading, in January-November 2011, the average investment size was higher than US$35.00M of the same period in 2010.
In terms of investment strategy, there were totally 550 growth capital investments in the first 11 months of 2011. Among them, 511 deals disclosed a combined investment amount of US$13.83B, with the deal number and investment amount taking up 84.1% and 58.1% of the respective total. Meanwhile, non-growth-capital investment deals occupied 15.9% and 41.9% of the total number and investment amount in January-November 2011 respectively. Of the deals, 28 were real estate investments with US$1.94B involved, including six deals sized above US$100.00M, three were M&As with a total of US$2.50B involved, among which the largest deal was KKR’s acquisition of Capsugel for US$2.40B and 73 were PIPE deals with a total amount of US$5.54B involved, including ten deals whose transaction size exceeded US$100.00M.
Between January and November 2011, all investment deals were distributed in 23 grade 1 industries. Except for broadcasting and digital TV and IC, all other industries witnessed a significant growth in terms of the number of investment deals compared with the same period in 2010. For instance, the machinery manufacturing industry ranked first in the number of investment deals evidenced by a total of 62 investments closed in 2011 and a 1.82-fold increase from the same period in 2010. Chemical raw materials & processing industry took the second place, which recorded 55 investments, 4.58 times of that in the first 11 months in 2010. Bio/healthcare, an investment hot spot in 2010, dropped to the third place, but still up by 10.2% year on year. As for investment amount, bio/healthcare, Internet and finance were firmly in the top three due to block trading which counteracted their disadvantages for only a handful of deals taking place. On the contrary, agr/forestry/fishing, food & drinks, textile & clothing, logistics and some other industries witnessed an increasing number of deals but a falling investment amount compared with the same period of 2010.
When comparing domestic and foreign institutions in terms of industry breakdown, we can see that foreign institutions surpassed domestic counterparts in education & training industry in terms of the number of deals and investment amount. And foreign institutions also gained higher average investment size than their domestic peers in bio/healthcare and media & entertainment industries, although the number of investments in the two industries was relatively small. In all other industries, domestic institutions had an advantage over foreign ones in terms of both the number of deals and investment amount.
Investments Densely Take Place; Central and Western Regions Serve as Goldmine for Domestic Institutions
During the first 11 months of 2011, investment deals could be founded in 32 provinces and cities. Among them, Beijing, Shanghai, Jiangsu, Zhejiang and Guangzhou (excluding Shenzhen) snatched the top five slots in terms of both the number of deals and investment amount. In total, they completed 314 investment deals and invested US$12.57B, accounting for 42.0% and 57.8% of the respective total. It was worth noting that central and western areas achieved an eye-catching performance marked by especially active investments in 2011. Specifically, Sichuan Province witnessed a sharp increase in the number of investments up to 38 deals and set a new record on the basis of the performance in 2010; in Xinjiang, a total of 16 enterprises got investments in contrast with the only one investment deal in the area in 2010; Gansu fulfilled the breakthrough to close four investment deals; Qinghai Province had its best performance over the years-two investment deals. By institution type, domestic institutions closed most deals in the above areas evidenced by a proportion of above 90.0% in terms of both the number of deals and investment amount.
Number of Exits and ROI Have Suddenly Fallen Since October, Sounding Alarm for Exits in the Future
During the first 11 months of 2011, there were 123 PE funds exiting from their invested enterprises, a decrease of 10.9% compared with the same period in 2010, namely 138 deals. In terms of exit option, 111 of the 123 deals exited through IPOs, six through M&As, three through trade sale, one via by management buyout and two by other ways.
Exit deals in the first 11 months of 2011 were distributed in 21 grade 1 industries. Machinery manufacturing and electronic & opto-electronics equipment industries shared first place with 14 deals for each. Machinery manufacturing industry witnessed a remarkable drop from the 23 deals in 2010, whereas electronic & opto-electronics equipment industry soared by 75.0% from the eight exits in the same period of 2010 and already surpassed the total of 2010. In 2011, construction/engineering industry recorded a sharp rise in terms of the number of exits and totally reported 12 deals in the first 11 months of 2011 in contrast with the four deals in the full year 2010. Meanwhile, chemical raw materials & processing, textile & clothing, automobiles, agr/forestry/fishing, finance and IC industries became especially more active in exiting as evidenced by the fact that the number of deals in the first 11 months of 2011 was higher than that of the same period of 2010 and even the full year 2010. By contract, all other industries recorded a falling trend, represented by bio/healthcare industry which experienced a dramatic decline in the number of exits in the first 11 months of 2011, i.e. six deals, less than 40.0% of the same period of 2010.
In terms of IPO exit, due to the poor performance of China concept stocks and the impact of the VIE mode on investors’ confidence, PE institutions encountered obstacles in exiting from their investees through IPOs. Between January and November 2011, only five exits were completed in the US market through IPOs and one took place in Taiwan Stock Exchange. Meanwhile, the influences of the slowdown in IPOs in domestic market and constant downturn in secondary market had increasingly pronounced impacts on the exits of PE institutions. Despite of the year-on-year increases in Q1’11-Q3’11, Q4’11 saw a nosedive of the number of IPO exits. Only ten PE funds fulfilled exits in China in October-November 2011 from only four IPOs. From the viewpoint of ROI, the data released by Zero2IPO Research Center showed that the average book ROI for IPO exits of PE institutions on domestic markets in Q1’11-Q3’11 were 4.89 times (excluding the book ROI of 180.0 times for the exit of New Horizon Capital from Sinovel), 7.16 times and 4.56 times respectively, but the average ROI for exits in October and November 2011 was only 2.78 times. It is fair to say that PE institutions remained under considerable stress in exiting both at home and abroad.