China’s venture capital fund managers have one common problem: too much money.
There is too much liquidity, too many investors looking for opportunities and too few good deals to go around. That leaves a growing number of venture capital fund managers fighting over a limited number of targets, which sends prices skywards.
The amount of money available in China for venture and growth capital has grown in the last three years to almost US$8 billion, said Vincent Chan, north Asia managing director at JAFCO Asia, a fund management company.
According to a report published in early September by Dow Jones VentureOne and Ernst & Young, venture capitalists spent US$757.9 million on 85 deals during the first half of 2006. In the second quarter alone 54 agreements were struck worth a total of US$480.1 million; the highest dollar amount in two and a half years and double the total spent in the same quarter in 2005. Much of the money went to new ventures, and the average deal size increased to US$4.3 million, up from US$3.6 million in 2005.
The situation is not unique to China. "Globally, this is one of the best fundraising years. There’s just tons of money out there. China is no exception," said Robert Partridge, transactions advisory services leader at Ernst & Young. "The challenge in China is finding good deals and closing good deals."
One problem is that investors may be putting money in China funds regardless of fundamentals.
"When there is a certain excitement in the market people behave in an irrational manner," Chan said.
Another problem is a shortage of experienced managers with track records beyond a deal or two. Given the youth of China’s VC funds and the exponential fund growth (from 1 to 10 to 100), there are just not enough experienced managers around.
About 10 funds were launched in 1999-2000 but now there are roughly 100 in operation – fewer than the thousand or so in the US but, perhaps, far too many for the available talent.
Still, China’s opening continues to create opportunities, expanding on the flowering of the early to mid 1990s that led to some legendary success stories and more than a few busts.
If a generation of funds lasts two to three years, China’s homegrown venture capital funds are in their third generation and the first few managers with real experience are emerging. Many of those managers are launching their own second funds. Those who were successful the first time out now have more freedom and independence and their fundraising targets are higher.
They are also dealing in a market with no shortage of interested investors and enough money floating around to push up the cost of any deal.
So, when Chinese managers and investors meet in early November for the annual meeting of the China Venture Capital Association, the question on many lips may not be where to find money but when the bust will come.
"These days there is too much money," said Roman Shaw, president of DT Capital Partners, a venture capital firm that just closed fundraising on a fund worth more than US$100 million, Shaw’s second.
Speaking on the sidelines of the Super Return Asia 2006 conference in Hong Kong in September, Shaw underlined how the deals in China are much sought after.
"There is intense competition for good investments. Guys who didn’t want to talk about China are now looking for deals ? We will bust sometime."