Struggling capital markets and a shaky global economic climate have slowed the flow of venture capital and private equity (PE) investments into China to a mere drip.
The limited partners behind many PE funds, as well as foreign investment banks and hedge funds, have retreated due to problems at home. Though there have been genuine concerns that the stream of funds would stop altogether, said Rocky Lee, a partner at law firm DLA Piper, "there is still money coming in."
"It will be a pretty slow year for everybody," said J.P. Gan, managing director at Qiming Venture Partners, a Shanghai-based fund. Not only will there be fewer buyers, but also fewer investment targets. Would-be entrepreneurs of the sort that created the last wave of startup successes will be less inclined to leave jobs at multinationals to strike out on their own.
This matters less than it might, since most investors will be focusing their attention in 2009 on the companies already in their portfolios, said Gan. With high growth rates gone and underlying flaws that were masked by good times now surfacing, funds will do more trouble-shooting than opportunity-seeking.
"It’s going to be back to basics [for most investors]," said Gan.
However, those that do make investments this year will have considerably better bargaining positions than in recent times as target firms become more realistic about their earnings. Many investors believe 2009 will be "an excellent vintage year" for PE funds, said Lee, as lower valuations should translate into greater returns when the time comes for portfolio companies to list in a few years. Unlike Europe or the US, leverage is not an issue for Chinese firms, many of which are cash-rich.
Sectors to watch: Health care and green-tech, both of which will benefit from government spending. Also consumer-oriented sectors like retail, which will receive a knock-on effect from improvements in China’s social safety net.