Investment Updates News
- Venture capital deals down 10 percent
Date: 22-May-2007 Sources: (Shenzhen Daily)
VENTURE capital investment deals completed in China declined in the first quarter after the country tightened rules on foreign acquisitions of assets last year, a survey showed.
Thirty-six deals valued at a combined US$343.5 million were closed in the quarter, said the China Quarterly Venture Capital Report released by accounting firm Ernst & Young LLP and Dow Jones VentureOne last week. The number of deals completed declined by 10 percent from a year earlier while the total investment fell 5 percent.
'We always expect everything to just keep growing in China,'' said Bob Partridge, Ernst & Young's Hong Kong-based transaction advisory services leader for China. 'So the fact it wasn't growing was a surprise.''
A new rule taking effect last September tightened government scrutiny over acquisitions of Chinese assets by foreign companies. The new regulation came amid an outcry over overseas companies such as private equity firms being allowed to buy Chinese State-owned assets on the cheap.
Actual foreign direct investment in China grew 10.2 percent to US$20.4 billion in the first four months this year, according to the Ministry of Commerce. Foreign investors have been enticed by opportunities in the world's fastest-growing major economy and the Chinese currency, which gained 1.03 percent against the U.S. dollar in the first quarter.
'Everyone believes they are looking at more deals,'' said Partridge. 'But the actual closing of deals seems to be getting more delays because of issues around being able to set up offshore structures and the related approvals.''
The longer hiatus between Christmas and the Chinese New Year, which arrived later this year than last, may have also contributed to the slowdown in deals, Partridge said.
The new rule issued by six Chinese ministries and regulatory agencies in August required foreign investors to seek clearance from the Ministry of Commerce before acquiring control of companies in key industries, or those that own well-known trademarks and traditional brands.
Approval from Ministry of Commerce is also required when domestic companies or individuals set up offshore vehicles to buy domestic companies connected to them, according to the rule.
When domestic companies or individuals set up offshore special-purpose vehicles to facilitate international first-time stock sales of domestic companies they control, the regulation effectively requires the initial public offering to be completed within a year.
Previously, many deals involving less than US$100 million needed only local government approval, Liu Jinrong, a partner of Beijing-based Global Law Office, said in November.
'There is a bit of an adjustment period here,'' said Partridge. 'Until maybe a new structure is created or the government does make some modifications, we probably are going to see a bit of a slowdown in the number of deals that close.''
To get around the rules, foreign venture capital investors are increasingly considering setting up companies in China, rather than offshore, for such investments. A growing number of them are also exploring the possibility of listing the Chinese companies they buy on China's domestic stock market instead of on an international exchange, Partridge said.
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