What are the biggest challenges now facing China’s private equity in-dustry?

Capital investment is a new business sector in China and the laws and regula-tions covering it are still being devel-oped. For example, the ground rules for partnerships, taxation, investment targets, currency policies and exits still need to be clarified.

Deficiencies in the legislative and regulatory framework prevent institu-tional investors from fully contributing to the private equity market. Institu-tional investors still hold a lot of unex-ploited capital.

Partnership is also a relatively new concept in China, where both institu-tional and minority private investors can interfere with a company’s executive management. This erodes the ownership structure of partnerships and compli-cates fund managers’ decision-making about these companies.

Financial crisis has hit China’s fast-grown

venture capital business.

Despite investors’ caution, economic

prospects continue to be positive.

Urbanisation combined with rising

incomes will boost consumer demand,

believes Yichen Zhang, Chairman of CVCA

(China Venture Capital Association).

China invests in economic growth

»

Text: Matti Remes | Photos: AOP/Alamy and CVCA

Yichen Zhang, Chairman of CVCA

4 Industry Investment 2/2009 5Industry Investment 2/2009

Demand for cutting-edge consumer and brand products is increasing

“”

How did the Chinese private equity market do last year?

Compared to 2007, the number of funds doubled and fundraising increased by one-third. According to a Chinese research company, Zero2Ipo, altogether 116 investment funds were established in China, and they raised funds totalling USD 7.3 billion.

Zero2Ipo’s information indicates that investments were made in 607 portfolio companies last year in China. Altogether 43 exits were made through IPOs, mainly in the Shenzhen and Hong Kong Stock Exchange, compared to 100 exits in 2007.

How has the global economic crisis affected venture capital investment in China?

Investors have become increasingly cautious, as they have throughout the world. This will inevitably depress fundraising in 2009. Enact-ing legislation allowing institutions to invest in venture capital funds would alleviate the situation.

Nevertheless, China’s economic prospects continue to be fairly prom-ising. Less than 10 per cent of GDP is derived from exports, and the high savings ratio boosts domestic demand. Company valuations are approaching a more reasonable level after some market adjustments.

Market uncertainty and sharp fluctuations have made it difficult for fund managers to assess companies’ market potential and risks, compli-cating investment decisions. Chinese investors think twice before making decisions, and so spend more time assessing potential targets. We live in a time when experienced investment managers can prove their competence by making rational decisions.

The slowdown in IPOs will con-siderably limit investor’s exit oppor-tunities. The economic climate has also highlighted some unexpected and unwelcome issues that must be addressed – such as inadequate work-ing capital and unattainable profits.

What sectors most attract Chinese investors?

Urbanisation and the general increase in incomes are expected to fuel steady growth in consumer demand. This will boost demand for cutting-edge consumer and brand products. Sec-tors that will profit from this include the food industry, cosmetics and the healthcare sector.

Investments in capital assets will also grow, largely through invest-ments made to develop transport connections and to reconstruct the infrastructure and the area damaged by last year’s earthquake.

The CNY 4 trillion (approx. EUR 430 billion) stimulus package implemented by the Chinese gov-ernment will boost construction and infrastructure projects, and enable

industries in those sectors to stabilise their business.

Venture capital investment is still young in China. How will you promote its visibility?

As an active operator in the field, and as the Chairman of CVCA and a member of the Eleventh National Committee of the Chinese People’s Political Consultative Conference, I have encouraged the regulatory authorities to develop legislation and monitoring systems that would promote the growth of the venture capital market. It has been thrilling to notice that my proposals have been addressed. After a thorough investigation and processing by sev-eral teams, some obstacles slowing down capital investments in China have now been removed.

However, achieving an effective system requires more work. CVCA intends to continue highlighting important issues and challenges that the venture capital market must over-come. One of them is to improve the skills of venture capital players.

Is China interested in Finland?

So far no investments have been made in Finland. Finland is, however, famous for its innovative operating environment and pioneering posi-tion in the IT business. We are also familiar with your broad expertise in the latest technologies.

Finland has actively promoted and invested in emission-free energy production in Asia. This sector could offer interesting opportunities for Chinese investors also.

www.cvca.com n

n Established in 2002.

n Over 150 venture capital companies as members.

n Members manage investments amounting to over USD 500 billion.

n Chairman Yichen Zhang is the CEO of CITIC Capital Holdings Ltd. Previously he was a Managing Director at Merrill Lynch responsible for the Asia-Pacific region and he also worked at Bank of Tokyo Securities in New York. Mr Zhang is a member of the Eleventh National Committee of the Chinese People’s Political Consultative Conference, and is a graduate of Massachusetts Institute of Technology, USA.

China Venture Capital Association CVCA

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