China Daily is reporting the Chinese venture capital and private equity industry has hit a major stumbling block as Asian economic growth grinds lower. While stories of an economic slowdown in China have been rather frequent over the last few months, this is among the first indications that investment is actually declining in what remains one of the largest capital markets in the world in terms of new allocations.
The level of capital raised by Chinese focused private equity firms in the first half of 2012 fell dramatically, down to only $8.6 billion from $37.5 billion in the first half of 2011. The number of investments undertaken by private equity firms saw a similar decline, falling to only 653 investments from 1,105 in the same 2011 period.
Manufacturing investment down, health care and internet ventures up
One of China’s largest export markets is Europe, and economic troubles there have put a damper on investment in new manufacturing facilities and other elements of the consumer goods industry. While investments in this sector have fallen sharply, health care related ventures have been the primary target of traditional private equity firms. Twenty-three deals occurred in this sector during the first half of the year.
In the higher risk venture capital segment of the private equity world, internet ventures received the most attention with 72 investment deals totaling $471 million. Private equity firms are looking to cash in on search engines and social networking, which have yet to be fully saturated in China. This is a stark contrast to the United States and other western markets where Google and Facebook have a stranglehold on this market.
Financial scandal hits China
While Chinese firms continue to attract money from the United States and other western nations, investors are thinking twice about placing funds overseas after a series of financial scandals and fraud allegations have hit a number of Chinese firms. One example is Sino-Forest, a Chinese forestry products company, which has been accused of a billion dollar fraud by the Ontario Securities Commission in Canada.
China’s success hinges on European response
Those that are considering looking for employment in the private equity sector may need to think twice about previously exciting China or Asia focused funds. The outlook in this region of the world hinges on the success of European leaders in dealing with their debt situation and subsequently restarting consumer demand. The failure of European governments to effectively deal with their economic issues will impact other Chinese markets as well, most importantly the United States. Whether the statistics from China are the first indicator of a decline in overall private equity activity remains to be seen. The economic data from China to be released in the coming months will be important in determining the direction of employment and future growth opportunities in the private equity sector.
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