China VC investment rises ahead of Alibaba IPO

Investment into mainland venture capital funds and venture-backed companies climbs in the first quarter, as a resumption of IPOs in China provides a vital exit route for investors.
China VC investment rises ahead of Alibaba IPO

Chinese venture capital activity has perked up, with funds raising $1.07 billion in Q1 and venture-backed IPOs reaping $2.05 billion, in the run-up to the much-anticipated listing of Alibaba in New York.

The $1.07 billion was raised by six venture funds that closed during the quarter, which is up 37% from Q4 2013, according to Dow Jones Venture Source research.

Qiming Venture Partners, based in Shanghai, led VC activity during the quarter, raising $500 million for its fourth VC fund. It was followed by US-based DCM’s seventh China venture fund, which closed at $330 million, and the debut fund of Shanghai’s Banyan Capital, which raised $206 million.

Banyan Capital – a spin-off of mainland VC pioneer IDG Capital Partners – had initially targeted $150 million, but was reportedly oversubscribed after only about two months in the market.

In Q1, 27 VC-backed mainland companies went public, raising a total of $2.05 billion, up 26% from the previous quarter (See graph: Chinese VC-backed IPOs, 2011-14).

Nearly half of the 24 companies that launched IPOs in Q1 were from the industrial goods and materials sector. The top IPO for the quarter was by Shaanxi Coal Industry, whose listing on the Shanghai Stock Exchange raised the equivalent of $661 million.

Other VC-backed IPOs were considerably smaller, with Neway Valve’s Shanghai listing raising $146 million, while Chenzhou City Jingui Silver Industry’s took in $124 billion from its debut on the Shenzhen Stock Exchange.

The IPOs represent a rebound from Q1 2013 when there were no VC-backed listings in China and only two in the following quarter. A bottleneck in mainland listings had effectively closed the most widely-used exit strategy for many VC and private equity firms in the market.

The return of the IPO exit route may have helped boost investments into mainland VC-backed companies, which in Q1 totalled $2 billion through 90 deals. It represents a 55% increase in capital inflows from the previous quarter.

Companies in the consumer services sector accounted for $1.4 billion of the amount of invested in VC-backed companies, followed by IT ($398 million) and business and financial services ($221 million).

However, Dow Jones Venture Source’s classification of consumer services includes operators of online retail businesses, including electronic commerce sites.

The biggest deal among all VC-backed companies in Q1 was a $400 million investment by Tencent Holdings into Shanghai Hantao Information Consultancy. The latter operates the popular website, China’s largest consumer review website.

Bullish investor sentiment towards mainland online consumer businesses were buoyed last year with the IPO plans of Alibaba – China’s biggest e-commerce retailer, which is expected to raise up to $25 billion this year through a US listing.

However, valuations of mainland online businesses may be dampened by an ongoing global tech stock rout, which saw the stock of Hong Kong-listed Tencent – which operates the WeChat mobile messaging platform – drop 6.7% on April 11.

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