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Record IT Investment Fuels China Venture Capital Investment

by Mary Swire, Tax-News.com, Hong Kong

17 August 2007


Venture capital firms invested more money than ever before in “information services” companies in Mainland China, as overall venture investment produced 55 deals and reached $560 million during the second quarter of 2007, according to the China Quarterly Venture Capital Report released by Dow Jones VentureOne and Ernst and Young.

This represented a 49% increase over the $375 million invested in the first quarter of the year, the report revealed. Over the first quarter, the amount of money invested in information services, which include blogs, social networks, wikis and other ‘Web 2.0’ companies, increased by 100% to a record $209 million in 22 deals.

Overall, the second quarter saw significant investment in information technology companies, with 36 deals raising $347 million in financing — the greatest IT investment seen since the third quarter of 2003, and an 82% increase from the previous quarter. The largest reported IT deal for Mainland China was the $31.5 million second round for Beijing-based ChinaCache, a profitable provider of network services for Web sites and other content providers.

"As investors move to monetize China’s Internet, we’ve seen a steady and consistent increase in the amount of capital invested in IT deals,” observed Bob Partridge, Ernst & Young’s Transaction Advisory Services Leader - China. “The median amount of capital put to work in IT deals in Mainland China now stands at $6.2 million, the highest on record and up from the median of $5 million seen in 2006.”

The 'business, consumer and retail' segment in Mainland China also saw record amounts of investment in the second quarter, with 15 deals garnering $198 million, according to the report. That was more than six times the $31 million invested in the first quarter, and 23% more than the previous record of $161 million invested in 15 deals during the second quarter of last year. Within this segment, $181 million went to 11 consumer/business services companies, which include non-technology-focused services. The biggest reported deal in this category, and for Mainland China overall, was the $85- million first round for Shanghai-based Hanting Hotels, an economy hotel line for business travelers.

“What we’re seeing in China is the result of ever more opportunistic investors,” observed Jessica Canning, Director of Global Research for Dow Jones VentureOne. “Venture capitalists are expanding their focus beyond the Internet and backing more bricks-and-mortar types of businesses that correlate well with China’s emerging economy. We’re seeing more rounds for outfits like outdoor advertising, entertainment and travel services companies.”

The report showed that there was still no breakthrough investment in the health care sector, as venture capitalists invested $13 investment in three health care deals. Even so, biopharmaceutical companies saw the greatest amount of investment since the first quarter of 2004, with $9 million put to work in two deals during the quarter. The data also showed that one energy company raised a $2-million round in the second quarter.

Early stage deals accounted for a greater percentage of the overall deal count, as 53% of deals in the second quarter were seed and first rounds. Most notably, there were 29 first rounds closed, up from 17 in the first quarter of the year. Second and later rounds remained virtually unchanged. Reflecting the quick development of ‘Web 2.0’ products and services, 50 of Mainland China’s 55 deals were for companies in advanced stages of development. Eight deals were for companies already turning a profit, and 42 had fully developed product offerings.

A comprehensive report in our Intelligence Report series examining tax-sheltering arrangements for investors, including Venture Capital, Forest Finance, Film Finance, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report5.asp

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