China IPO closure stalls VC fundraising

VC fundraising was down 50% in 2013 due to a lack of exits discouraging LPs.

Fundraising by venture capital firms in China declined substantially in 2013, funds raising a fraction of what they did year-on-year. In the fourth quarter of the year, GPs raised just $182 million, an 83 percent drop year-on-year, recent data from DJX Venture Source revealed. 

The disappointing figures represent a wider trend of waning interest in China’s venture capital market, as GPs fail to realise their investments and return capital to investors.

During the full year 2013, venture capital GPs raised just $1.97 billion for China, a 50 percent decline from the $3.96 billion raised in 2012. The number of funds in market also dropped to 21 from 49 in 2012.

“The main exit route for many venture start-ups is through IPO. During the last two years the IPO markets have been closed, particularly the onshore markets in China, and that has affected a lot of exits and distributions from a lot of these funds,” Vincent Ng, partner at Atlantic Pacific Capital, told Private Equity International.  

Just 15 venture capital-backed exits were completed in 2013, a 67 percent drop from 2012 and an 85 percent decline from 2011.

The 15-month freeze on China’s IPO markets, coupled with investor caution impacting Hong Kong and US stock exchanges, has prevented many firms from exiting Chinese businesses over the last two years.

“What this means is a lot of LPs are just sitting there twiddling their thumbs and waiting for cash to come back. They’ve been a bit disappointed with performance so far,” Ng added.

However, towards the end of last year, the IPO environment picked up, with Hong Kong and the US approving a number of Chinese businesses to list.

China saw 12 venture capital-backed companies go public during Q4 2013 – the highest quarterly figure since the second quarter of 2012.

The top three venture-backed IPOs during the fourth quarter were the $340 million listing of YuanShengTai Dairy Farm in Hong Kong, the $187 million float of on the New York Stock Exchange, and the NASDAQ listing of online travel company Qunar, raising $167 million, according to DJX Venture Source.

While the reopening of China’s stock exchanges and increased activity in other markets is likely to boost investor confidence in venture capital firms, Ng cautions that LPs still may have to wait to see capital come back from venture investments.

“The pipeline of companies waiting to IPO is vast. At the early stages it is like a funnel with only a small trickle coming through but a mass of companies waiting. There is optimism that [the reopening] will lead to more activity, but [LPs] have to bear in mind they still have a lock-up period.”

DJX figures also showed that investment activity in China’s venture capital market picked up in Q4, although not enough to boost full-year figures.

Venture capital firms invested about $3.5 billion in China-based opportunities in 2013, a 29 percent decline from 2012 and a 45 percent from the amount invested in 2011.

The Q4 recovery – seeing $1.49 billion invested in venture capital opportunities – was in large part thanks to consumer services companies, which raised about $985 million across 47 financings during the final quarter of the year.