Equity Financing for Early-Stage Companies in China Ning Jia School of Economics and Management Tsinghua University CARE Conference Understanding China s Capital Markets June 2014 1
Development of China s VC/PE Market Starting Up Phase 1 High Growth Adjustment Phase 2 High Growth Post-Financial Crisis Period 1985-1997 1998-2000 2001-2004 2005-2008 2009 - Present Key Features Early attempt at VC/PE to support economic reform and innovation Dot com fever & bubble Copy to China Foreign VC/PE enter China Dot Com bubble burst & VC winter Government contemplating new policies Launch of SME board Government enact favorable policies Rise of governmentbacked funds High return Recovery and reaching new height Launch of ChiNext 2
Fundraising ( 融 ) 25000 20000 15000 Rise of RMB funds post-2008: USD fundraising and investments slow down due to financial crisis Amendment to the Partnership Enterprise Law Launch of ChiNext with attractive price/earnings ratio US Funds are picking up again: US IPO market reopens to Chinese companies Chinese IPO suspension P/E ratio has come down 10000 5000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Feb-14 May-14 Data source: Zero2IPO RMB Funds (in $Mil) USD Funds (in $Mil) 3
Investment ( 投 ) Deal Sourcing Traditional method referral Social & Entrepreneurial Media Due Diligence Incubation + Investment 4
Investment ( 投 ) Industry Preference: 2014 Survey of Chinese GPs Healthcare TMT CleanTech 78% 76% 75% Consumer Service 63% Manufacturing Finance 29% 27% Agriculture Resources 11% 17% Logistics 6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 5
Investment ( 投 ) Investment Criteria Fit between investor and entrepreneur 6
Portfolio Management ( 管 ) Post-IPO stock performance (buy-and-hold return) of 273 companies listed on the SME board 7
Grandstanding As an Explanation? Chinese Funds Foreign Funds Duration of Fund 5-7 Years 10-12 Years LP Composition High Net Worth Individuals (Private Business Owners) Institutional Investors (Pension funds, Insurance Companies, Endowment) Role of LPs Active Passive 8
Exit ( 退 ) - Time to Liquidation Data Source: Ernst & Young 9
Exit ( 退 ) - Exit Ratio Data Source: Ernst & Young 10
Exit ( 退 ) Arbitrage Opportunity is Gone 11
Key Features of VC/PE in China 1 2 3 4 Fundraising and Investments are growing Foreign, Domestic and Government-back Funds each has distinct advantages Arbitrage opportunities are gone, investment focus moves to early-stage deals Limited post-investment value-added services 5 Limited exit channels 6 Grandstanding phenomena
Thank You! jian@sem.tsinghua.edu.cn 13