Overall private equity and venture capital (PE/VC) investment in Telecommunications, Media and Technology (TMT) reached a new half-yearly high in the first half of 2017, according to the MoneyTree Report released by PwC.
After a lackluster second half last year, PE/VC investment regained momentum in 2017, demonstrating investors’ confidence in the TMT industry.
The MoneyTree Report showed that there were 1,582 PE/VC deals in the first half of 2017, up 104 from the second half of 2016. These deals garnered a total value of US$30.75 billion, up 22.9% from the previous six months.
In the first half of 2017, 49 deals had a single deal value over US$100 million, up nearly 50% from the second half of 2016.
These large deals accounted for more than 70% of all deal value in the TMT industry over the period. Additionally, one investment registered as the largest single deal value seen since 2014.
“Both investment value and volume rose in the TMT sector, which again indicates that investors still believe that the TMT industry in China has great potential,” says Wilson Chow, PwC Global and Mainland China/Hong Kong TMT Leader.
“The outstanding performance of large deals further reflects that investors prefer unicorn companies with leading positions and stable businesses. Also of note, in the first half of this year, the number of deals with a single deal value below US$100 million exceeded 1,500, indicating investors are still looking for the next potential unicorn enterprises. This polarized scenario of investor activity is expected to continue for the time being.”
With regard to sub sectors, Internet and mobile Internet was again positioned front and center, generating deal value of US$21.306 billion in the first half of 2017, including three deals each worth over US$1 billion.
Investment in the Technology sector rose 56% from the previous six months, with deal value exceeding US$4 billion in the first quarter, marking a historical high. There were 146 deals in Entertainment and Media, the most the sector has seen since 2014.
Total deal value in the Telecommunications sector was US$942 million, with the average single-deal value tripling.
Chow says, “With shared transport embedded into the daily life of ordinary people, and the growing popularity of short videos and content distribution platforms, leading companies in these areas are attracting massive funds, and consequently, we see mega deals emerging constantly. Also, due to the rapid development of mobile games, live-streaming platforms and game-related content providers are successfully attracting capital.”
The report also shows that in the first half of 2017, first-round investments in the TMT industry accounted for more than 50% of the total. The value of first-round investments posted a moderate increase of 15%. But based on the historical data since 2014,the volume and value of first-round investments in 2017 were still at historically low levels, which shows that, to some extent, investors remained cautious and took a “wait and see” attitude.
The main battlefield
Chinese start-ups consider Internet consumption to be the main battlefield. In the first half of 2017, the Internet and mobile Internet was ranked first in both deal value and volume in terms of first-round investment. However, the Technology industry rose rapidly, and the Entertainment and Media industry was also catching up.
As there has been a slowdown in growth of Internet users, investors are now looking for the next potential boom in the TMT industry.
In the first half of 2017, IPOs were still the dominant exit channel in the TMT industry, which was partly due to the active A-share market and accelerated pace of IPO reviews.
Still, in the first half of 2017, IPOs accounted for a smaller portion of all exits compared with the second half of 2016.
In recent years, a number of emerging business models have appeared in the TMT sector. Strict regulation and review, together with weak profitability, posed substantial challenges to these enterprises, resulting in more difficulties for IPO exits.
In terms of sub-sectors, exits in the Technology and Telecommunications sector were mainly through IPOs. But in the Internet and mobile Internet sector, which had seen many emerging business models, IPO exits accounted for a smaller proportion.
Chow concludes: “In the first half of this year, large-sized deals emerged, confirming the market had a keen interest in companies that meet their expectations. Nevertheless, risks in large-sized investments still can’t be underestimated.
“After rounds of consolidation in the industry, there are risks that some target companies have excessive valuations. Additionally, as most of the Chinese unicorn enterprises now serve Internet consumers in the local market, the regional economic cycle will have a bigger impact on them than before.
“Further, in the emerging industries where many of the unicorn enterprises operate their business, laws and regulations have yet to be well-established, so investors need to prepare for policy risks.”