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Buyout firms and VCs held back by crisis

By Zhang Qi (China Daily)
Updated: 2008-10-27 15:55

Chinese start-up companies have long been darlings of overseas buyout firms and venture capitalists given their dazzling growth potential, helped by the country's economic boom.

However, the global credit freeze and financial turmoil are putting buyout deals and venture capital investments related to Chinese companies on hold.

And the dry spell for the deal-making could be longer than many expected as buyout shops themselves are also struggling to survive in the global financial meltdown.

Private equity firms usually borrow most of the money they need to buy a company and then resell it for a bigger profit after restructuring the assets.

And venture capitalists inject cash investments into a growth company and make a profit after it launches an IPO.

However, as the funds buyout shops need are drying up and stock markets zig-zag, more deals are being put on the ice.

Deals are down

Venture capitalists arranged 20 financings totaling $492 million for the third quarter, down 83.7 percent compared to the previous quarter, according to Zero2IPO, a Beijing-based research company tracking such activities.

Existing funds invested in 109 Chinese firms in the quarter, and the 99 that disclosed details received $788 million in total, a 34.6 percent decrease from the second quarter, trending down on the previous quarter for the first time in five years, Zero2IPO says.

"Foreign VC companies are taking a more cautious approach in China as fund-raising is becoming difficult with banks pulling credit lines," says Zhao Xiaobo, an analyst at Zero2IPO.

Only two foreign VC firms expanded two financings totaling $65 million, while 14 Chinese institutions arranged 16 funds worth $391 million, accounting for 80 percent of the total funds.

A VC craze has been pushing an increasing number of Chinese companies to go public overseas in recent years. However the number of overseas IPOs by Chinese companies dropped 62.2 percent year-on-year in the third quarter of this year and the combined valued dipped 86.1 percent.

And the prospects in the coming quarters remain bleak. The Washington Post recently reported that more than half of the technology companies surveyed believed the stagnant IPO market will not begin to rebound until at least 2010.

Martin Hintze, Managing Director at Goldman Sachs responsible for its buyout business in German-speaking Europe, was cited by Reuters as saying that banks' reluctance to lend had made financing difficult even for deals worth less than 1 billion euros.

That means signs of a pickup of buyout activities will not come "until 2010 at the earliest, maybe even 2011", the director said last week.

The credit crisis is weighing on the potential selling price of companies, making it difficult for private equity to exit from their investments.

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