Holding back

Chinese start-up companies have long been darlings of overseas buyout firms and venture capitalists given their dazzling growth potential, helped by the country's economic boom.

However, the global credit freeze and financial turmoil are putting buyout deals and venture capital investments related to Chinese companies on hold.

And the dry spell for the deal-making could be longer than many expected as buyout shops themselves are also struggling to survive in the global financial meltdown.

Private equity firms usually borrow most of the money they need to buy a company and then resell it for a bigger profit after restructuring the assets.

And venture capitalists inject cash investments into a growth company and make a profit after it launches an IPO.

However, as the funds buyout shops need are drying up and stock markets zig-zag, more deals are being put on the ice.

Deals are down

Venture capitalists arranged 20 financings totaling $492 million for the third quarter, down 83.7 percent compared to the previous quarter, according to Zero2IPO, a Beijing-based research company tracking such activities.

Existing funds invested in 109 Chinese firms in the quarter, and the 99 that disclosed details received $788 million in total, a 34.6 percent decrease from the second quarter, trending down on the previous quarter for the first time in five years, Zero2IPO says.

"Foreign VC companies are taking a more cautious approach in China as fund-raising is becoming difficult with banks pulling credit lines," says Zhao Xiaobo, an analyst at Zero2IPO.

Only two foreign VC firms expanded two financings totaling $65 million, while 14 Chinese institutions arranged 16 funds worth $391 million, accounting for 80 percent of the total funds.

A VC craze has been pushing an increasing number of Chinese companies to go public overseas in recent years. However the number of overseas IPOs by Chinese companies dropped 62.2 percent year-on-year in the third quarter of this year and the combined valued dipped 86.1 percent.

And the prospects in the coming quarters remain bleak. The Washington Post recently reported that more than half of the technology companies surveyed believed the stagnant IPO market will not begin to rebound until at least 2010.

Martin Hintze, Managing Director at Goldman Sachs responsible for its buyout business in German-speaking Europe, was cited by Reuters as saying that banks' reluctance to lend had made financing difficult even for deals worth less than 1 billion euros.

That means signs of a pickup of buyout activities will not come "until 2010 at the earliest, maybe even 2011", the director said last week.

The credit crisis is weighing on the potential selling price of companies, making it difficult for private equity to exit from their investments.

As a result, they are also trying to cut the prices for deals that have yet to be finished.

China's flagship telecom equipment maker Huawei Technologies, earlier this month announced it had suspended the auction of a stake in its terminal unit, falling victim to the ongoing financial crisis.

US private equity groups Bain Capital and Silver Lake had been in talks with Huawei over the deal, which could be worth about $2 billion.

The deal was expected to be finalized in November, insiders said.

However, the two US companies hoped to cut the value of the deal, citing the economic crisis, but Huawei rejected this, insiders said.

US private equity giant Blackstone has been negotiating a deal worth $160 million to buy a 90 percent stake in a commercial building in Shanghai from Hong Kong-listed VXL Capital.

Blackstone dropped the deal because it couldn't agree on the price with VXL, according to some media reports.

Industry observers blame the stalled deal on the slumping property prices and global financial woes.

VXL later denied the media reports, saying it was still pressing ahead with the deal but acknowledging the closing date for the deal has been "rescheduled".

Poor buying sentiment

According to a report released by Beijing-based research house ChinaVenture last Wednesday, the private equity investment in China dropped to $2.12 billion in the third quarter of this year, a decrease of 17.1 percent from the previous quarter.

Disclosed deals numbered only 19, compared to 33 in the previous quarter.

Morgan Stanley was the largest private equity investor in the third quarter by investing a total of $770 million.

As many of the investors themselves are already sunk, those deals, which have been already closed, may also be affected.

"When we heard the news (Lehman Brothers filed for bankruptcy) on September 15, the first thing we did was to check whether we had any business link with Lehman Brothers as well as whether it has any link with the company in which we had an investment," Tsang Kwong Yue Conrad, a Principal with Baring Private Equity Asia, was cited by the China Business News as saying.

Baring Private Equity Asia later found a VC arm of Lehmand held a 20 percent stake in a company in which Baring had an investment.

"What came to my mind first at that time was: what would happen if Lehmans chose liquidation?" recalled Tsang.

"And I was wondering how the liquidation would affect our own business if Lehman chose to sell its stake at any price."

Later, Japan's Nomura Holdings Inc acquired Lehman's Asian assets after the US investment bank went bust.

Then a new problem arose. "Now I'm wandering whether Nomura would choose to hold the stake on the company (we invested) or just sell it?" Tsang said.

(China Daily 10/27/2008 page3)