Venture no further (2)

Boom is over

China's first VC fund was initiated by several ministries including the Ministry of Finance in 1984, when the country had few competent fund managers. The sector experienced slow growth until 2004, when US-based Newbridge Capital launched the first PE fund investment in China by putting 1.25 billion yuan ($200 million) into Shenzhen Development Bank.

The real surge in activity for PE and VC funds began in 2009, amid the sudden increase in liquidity brought by China's launch of a 4 trillion yuan fiscal and monetary stimulus program to battle the global financial crisis.

"The prosperity was irrational in the past three years," Huang Song, director of the Financial and Industrial Development Research Center at Peking University, told the Global Times. During this time, the number of PE and VC funds in China tripled, and the growing number of investors found themselves battling over a limited number of suitable projects.

By the third quarter of 2012, however, the number of newly-launched PE firms in China had declined to 116 from 200 in the same period of 2011, according to Zero2ipo.

One of the factors that fueled the boom in the sector was the launch of China's much-anticipated Growth Enterprise Board (GEB), a NASDAQ-style secondary board, in May 2009. This new outlet for investment appeared to offer big opportunities for the PE and VC funds.

However, the GEB's performance has failed to meet expectations, partly due to the general malaise afflicting China's stock markets amid the economic slowdown.

"It is more difficult right now for PE firms to cash in by selling their shares in GEB-listed companies," Li said.

Investors have become more cautious than two years ago "because of tightened liquidity, difficulties in financing and fewer qualified projects amid the current macro-economic conditions," Zheng Zhixing, an analyst at Zero2ipo, told the Global Times.

Zheng said the PE firms will be forced to make more rational judgments in future, with more consideration for risk than before.

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