China’s PE, VC Markets Fueled by IPOs & High Returns

(Reuters) – A booming IPO market and the lure of high returns kept China’s private equity sector humming in the first half, stoking fear of asset bubbles amid rising concerns over the quality of listed Chinese companies.

Fifty private equity funds raised $14.54 billion in China in the first half, doubling the amount raised during the previous six months, while the country’s venture capital market attracted a record $8.1 billion in fresh money inflows, exceeding last year’s total, according to consultancy Zero2IPO Group.

The feverish demand was partly fuelled by an average return of 20.6 times for such investors in the first half during which 207 Chinese companies including QiHoo 360 and Renren Inc went public in domestic and overseas markets.

Red-hot fundraising and investment activities have raised concerns that valuation of some industries such as the Internet has outpaced their growth potential.

“China’s Internet bubble is getting bigger and bigger, as the venture capital inflow into this sector during the past 18 months has exceeded the total during the previous two years,” Ni Zhengdong, CEO of Zero2IPO said.

“Many Chinese Internet companies may shut their doors around 2012-2013, and that would be a moment of sorrow for our venture capital investors.”

Chinese companies seeking IPOs overseas in the second half also face tougher regulatory and investor scrutiny as a series of accounting scandals involving companies such as Sino-Forest Corp have dented confidence towards overseas-listed Chinese firms.

New Horizon Capital, co-founded by the son of Chinese Premier Wen Jiabao, fetched a stellar unrealzsed investment return of 184.5 times from its pre-IPO investment in wind power company Sinovel Wind Group , the most profitable deal in the first half.

On average, Chinese private equity and venture capital firms achieved a return of 20.6 times as 94 Chinese companies backed by them went public during the January-June period.

Handsome returns were partly the result of high valuations on China’s Nasdaq-style second board for start-ups, which trade at about 50 times companies’ earnings, compared with 18.3 times for the Nasdaq Composite Index.

That is luring investors into China’s fast-growing private equity market, which the government hopes will channel more money into the private sector to aid economic growth.

Both local and foreign private equity firms, including Morgan Stanley and Goldman Sachs, are rushing to launch funds in China. They have announced plans to raise a combined $33.97 billion yuan for 51 new funds, Zero2IPO said.

(By Samuel Shen and Jacqueline Wong)