November 19, 2007 – Venture capital/private equity investing in China reached record levels in the third quarter, with $2 billion of new money committed across a broad range of industries. The figures were part of a detailed quarterly review compiled by Zero2IPO, an investment analyst devoted to the China VC/PE market.

During Q3, venture capitalists put $897 million to work in 88 enterprises, a record. However, fund raising slipped to just $1.3 billion, which was down 44% from the previous quarter. However, the drop is not surprising because, so far this year, fund raising has been more volatile than usual. The Q2 numbers were huge, but they followed an abysmal Q1. The $1.3 billion figure of Q3 looks like it is reverting to the steady growth numbers of 2006: Q3 was just above the rising trendline defined by each quarter in 2006.

According to Zero2IPO, there was an increase in the number of domestic funds to eight (out of a total of thirteen funds overall). The eight domestic funds raised $330 million. In general, China VC funds are smaller because the foreign-based VC funds have access to greater capital. The new domestic funds showed originality because they often took new forms, including trust VC funds and funds organized as partnerships.

Investments during the quarter were led by the broad IT group, which dropped to less than half the total dollars invested at 43%. Bio/Healthcare captured $51 million in 5 deals, representing 5.7% of all the money committed. The average investment, across all industries, was a high $12 million (twice the figure of last quarter). Bio/Healthcare was slightly below the average at a still respectable number of $10.2 million.

For exits that were completed during Q3, the IPO continued as the favorite of VC/PE backed companies, comprising 29 events or 83% of the total. Seven of those (20%) were in Bio/Healthcare. Zero2IPO noted that a new regulation, called Interim Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Circular 10), has made it more difficult to perform an IPO outside of China. As a result, the majority (16 out of 29) of the IPOs took place on the Shenzhen or Shanghai exchanges. The 16 domestic IPOs raised $12 billion, a record, while the 13 foreign IPOs bought in $1.8 billion. The single Bio/Healthcare IPO secured $23 million for the company.

On the private equity side, funds devoted to investing in Asia (including China) raised $9.7 billion during Q3. A total of 43 China companies received PE investments, which totaled $3.5 billion. There were 25 exit events for PE-backed enterprises, and 21 of those were IPOs. Five companies from the Bio/Healthcare sector received funds (11% of the number of deals), but the money invested in the sector was comparatively small: the total of $130 million invested (an average of $26 million per company) was just 4% of the total.

In addition to recapping the events of the past quarter, the Zero2IPO reports analyze emerging trends in the VC/PE sector and forecast the outlook for the future.

See our other Zero2IPO articles, or click here for more information on the Zero2IPO reports.

Disclosure: none.