PE/VC firms more prudent on TMT investments

Private equity and venture capital investment in China's telecommunications, media and technology sector, or TMT, was in full swing in the first half of 2014, but investors are being more prudent in the second half and that situation will continue next year, according to a report by PricewaterhouseCoopers on Wednesday.

PE and VC investment fell in the first quarter and then rose sharply in the second quarter, with total investment value in all sectors hitting a record $17.6 billion, up 200 percent quarter-on-quarter, it said.

In the first quarter, there were 245 PE and VC transactions in the TMT industry, accounting for 73 percent of total volume. The total investment amount, $2.3 billion, represented 39 percent of PE and VC deal value.

In the second quarter, the number of TMT investments reached 214, accounting for 52 percent of total PE/VC volume. Deals totaled $5.3 billion, comprising 30 percent of the total.

"The resumption of A-share initial public offerings widened the exit channels for private investment, which can explain the big leap in total investments in the second quarter and the bullish TMT investment activity in the first half," said Gao Jianbin, who specializes in China technology at PwC.

Gao said another reason for the second-quarter increases was that more merger and acquisition deals were transacted by PE and VC investors.

"In the second half and into next year, PE and VC investors will maintain a similar pace as in the first half," said Amanda Zhang of PwC's China technology practice. "Professional investors will be more prudent about investing in TMT deals as their valuations have been high, but good ones are still worthy of high input."

"There will be two investment avenues in the future: investing in a number of early-stage deals with small single investment amounts or putting large amounts into several deals after careful consideration," said Zhang.

The Internet sector was the most popular in the first half, with 199 deals, accounting for 43.4 percent of the total, followed by the TMT and entertainment and media sectors. In terms of deal value, the Internet sector ranked first with $3.1 billion in the first half.

The Internet sector includes e-commerce, online education, Internet services, social media and Internet finance. The e-commerce subsector took the lead in terms of deal value in the first half of 2014, surpassing the total for the whole of 2013.

"Typical of an emerging economy, China saw the rapid development of its e-commerce sector," said Zhang. "China has about 600 million netizens and 300 million online shoppers. Based on China's population, the e-commerce sector still has great scope for development."

Gao Jianbin, leader of the China technology section, said that Alibaba Group Holding Ltd's IPO was good news for the Chinese e-commerce sector, adding that Vertical e-commerce retailers offer potential and will be attractive for PE and VC investors in the near future.

The telecommunications sector includes telecom equipment and terminals, as well as mobile phones, the core of the sector. Mobile deal volume remained flat in the first two quarters but reached a peak in deal value with the second quarter hitting an unprecedented $861 million.

The report said that IPOs were the primary exit method for PE and VC investors. Of 92 exits in the TMT sector in the first half, 66 were through IPOs. Beijing remained the center of China's TMT industry, grabbing 61 percent of deals, said the report.

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