China continues to represent value!!!

Oct. 18, 2012 - PRLog -- In 2010, the talk was about recovery. However, in August 2011, much of the talk in the press, the workplace and at dinner parties centers around how the US and the European economies continue to struggle, how the markets continue to react to fears of new setbacks, defaults, the possibility of a double-dip recession and how China is growing as a world economic power.

In recent months, the economies of the world, as well as the equity and venture capital industries, have been affected, if not directly then peripherally by both natural events (tsunamis and earth quakes) as well as manmade ones ¾nuclear power plant melt downs, the passionate debate and the subsequent raising of the debt ceiling in the US, the downgrading by Standard & Poor’s of the US government’s rating from AAA to AA+, the pending American presidential election and that country’s continuously staggering unemployment rate, the sovereign debt crisis in Europe and the implementation in China of a stimulus plan described as roughly $500bn (‘Economic Crisis and Market Upheavals’, NYT, 14 August 2011).

Taking all of this into account, it is interesting to note that the various private equity (PE) industry reports published in the past couple of months show that although slower than most would have liked, and many had predicted in 2010, many believe that the economic recovery is in the right direction.

So, let’s assume we’re in the right direction. What does this mean to the venture and PE industries in terms of investment opportunities, IPOs, M&A’s and prospects for the future?

In January 2011, 207 PE fund managers worldwide were polled for a survey published on 18 May 2011 by Rothstein Kass entitled ‘Private Equity in 2011 Industry Trend Report’. Of the total, 80% think there will be more attractive investment opportunities in 2011 than in 2010. In addition, 67% of those surveyed think that there will be increased IPO activity by private equity portfolio companies this year as well.

The respondents, to the 2011 Global Venture Capital Survey sponsored by Deloitte and the National Venture Capital Association and announced in a press release on 22 June 2011, were less optimistic about the IPO market. More than 80% of the global venture capitalists surveyed for this report believe that the current IPO activity levels in their home countries are too low to support the health of the venture capital industry in their respective countries.

Mark Jensen, a partner at Deloitte and Touche LLP and national managing partner for venture capital services, stated in the press release that: “Clearly the industry continues to feel the ripple effects of the global economic downturn ¾most notably in the form of limited exit opportunities. However, with signs of improvement in the economy and easing of the liquidity crisis, the tide may be turning. Innovation continues to be an important drive in our economic health and a strong exit marketplace is critical to the venture capital ecosystem driving much of that innovation.”

The Deloitte survey cited the IT, healthcare services and clean-tech sectors as the most promising in terms of innovation. Sixty-nine percent of those surveyed in the Deloitte report cited a surge in investment in cloud computing, while 65% plan to increase investment in social and new media. Moreover, 62% of those polled plan to increase investment in clean technology, while 26% plan to maintain their existing levels in this sector.

M&A activity also appears to be picking up in various parts of the world. According to a 19 April 2011 report published by Roland Berger Strategy Consultants, since 2009 when the European private equity market bottomed out, it has since been gaining noticeable momentum. “M&A transactions rose 52% to EUR 36 billion in 2010, a positive trend”, that some believe will continue in 2011. Study author Gerd Sievers, a partner at Roland Berger in the Corporate Finance Competence Center, explained: “Fresh movement came into the private equity market in 2010 following the sharp downturn in 2009… (this noted)… we are still a long way from regaining pre-crisis levels.” The transaction volume on the European private equity market had reached €54bn in 2008, about 50% higher than in 2010.

Long way or not, the increase of M&A’s sheds light on yet another emerging trend. According to the Roland Berger report: “In the crisis of 2009, it was clear that Asian investors were keeping a low profile when it came to takeovers of European companies. By 2010, however, their interest had again increased….the number of M&A transactions in Europe rose from 13 in 2009 to 18 in 2010.” The reasons for this? Sievers suggests: “By acquiring European companies, foreign investors gain access to important technologies and Western European customers…this is an important step toward advancing the internationalism of their business.”

A growing trend we are seeing amongst Chinese companies is they now not only looking for innovative technology outside of China, but also for the right model to acquire such technology, the appropriate business channels to do so and the possibilities of opening corresponding research and development (R&D) centers, also outside of China. More and more companies are looking for advice on such matters, as well as access to technological innovation, know-how and, of course, a global network that reaches the world’s innovation hot spots in Europe, the US and Israel.

From our understanding, the reasons for reaching ‘outward’ vary: companies are looking to create a differentiation in the global market; they are also responding to encouragement by the Chinese government documented in the 12th five-year plan; these certain companies have a drive to position their ‘product’ as global technology; technology innovation from outside of China is viewed as a source for new thinking and ideas; by reaching outside of China, these companies believe they may reduce the ‘China risk’; most of the companies are attracted to the concept of a new market and taking advantage of the low prices now available in western markets; and, finally, quite simply, they are curious about the possibilities of venturing outside of China. And again, ‘outside’ could mean any hub of technological innovation, be it the US, Israel, Europe or elsewhere. They are looking for cross border deals.

Not surprisingly, cross-border deals were deemed as the most attractive deal type for 2010, according to 68% of those who responded to a survey by Bloomberg and published in its 2011 M&A Outlook report. Interesting, this 68% has been proven correct: in 2010, 49% of the global M&A volume was from cross-border transactions, a significant increase from 39% in 2009, and 30% six years ago.

Inside China, the M&A market boomed as well, both in the number of announced deals and the disclosed amount in 2010. 2,771 M&A’s were announced, posting a 13.80% sequential increase, and a total amount of US$177.21bn were involved, up 35.87% compared with the previous year. In total, 1,798 deals were completed, up 6.14% on a sequential basis, and a total amount of US$8.202bn was disclosed for the year, up 62.57% (China Venture, ‘Annual Statistics & Analysis of China’s M&As-2010’, 22 March 2011.)

Today, China is an island of stability and growth. Although it can’t solve all of the global problems, it is highly likely that much of the venture activity of the future may not only be with the entrepreneurs of China, but also centered in China. In Q1 2012 alone, a total 25 new funds were closed in Q1’11, up 66.7% quarter-on-quarter and 38.9% year-on-year; the fundraising amount surged to US$8.92bn, 4.33 and 3.04 times respectively of that in the previous quarter and year. Of the 25 new funds, 18 were raised by domestic institutions and the other seven ones were launched by foreign firms. In addition to the funds closed, there were 19 new funds initiated, 15 ones of which disclosed a total of target fundraising amount of US$14.90bn. (Zero2IPO Research Center, 18 April 2012). Though activity has so far been down in 2012, it is likely that China will continue to be fertile ground for the venture industry.