FINANCE & BANKING

PE/VC Investment Volume in TMT Reaches New High in 2H of 2016

The second half of 2016 saw overall private equity and venture capital (PE/VC) investment volume as well as total PE/VC investment volume in Telecommunications, Media and Technology (TMT) both reach their highest levels since 2012.

Investment values in both categories dropped, however, as investors adopted a rational response to the market, according to the MoneyTree Report released by PwC.

In the second half of 2016, there were 1,478 PE/VC deals garnering a total value of US$25.02 billion in the TMT industry.

During the third quarter, investment value in TMT deals declined, but accounted for a record 84% of the combined value of all deals involving PE/VC.

Investment volume in TMT rose significantly from the prior quarter, with 33 deals and a single deal value exceeding US$100 million, which was 1.4 times that of the second quarter, marking a record high.

In the fourth quarter of 2016, investment value and volume in TMT dropped significantly as expected. The investment value in TMT accounted for 29% of overall PE/VC deals.

Still, over the second half of 2016, investment value in TMT accounted for more than half of total PE/VC deals, while a TMT deal marked the highest single-deal value of the period, worth US$4 billion.

Highly concentrated and polarized

“The slowdown in the TMT industry occurred a bit later than the overall, but the industry’s popularity still dwarfs other sectors,” says Wilson Chow, PwC China and Hong Kong TMT Leader.

“Notably, investment is highly concentrated and polarized. Many of the deals are under US$100 million, representing relatively low value, while the number of unicorn companies with large-scale financing decreased.

“The trend reflects that valuations of unicorn companies are still high, which frightens away investors. Investors are looking ahead for the next potential unicorn companies with the hope of reaping a hefty gain.”

In the third quarter of 2016, first-round investments in the TMT industry still accounted for over 60% of the total.  In the fourth quarter, due to the overall slowdown, the proportion dropped to 46%.

However, the value of first-round investments against the total remained at a low level of 13%, with a majority of deals featuring a single-deal value below US$5 million. Furthermore, start-up funding still ranked first out of the four phases of investment, accounting for more than 50% of total investment.

Wilson Chow noted, “This shows that investors were still able to evaluate the future value of new products in a rational way. Projects with uncertainty gained relatively small investments, demonstrating the caution investors showed towards investing in start-up companies.”

Internet outpaces other sectors

With regard to activity by TMT sector, the Internet was again positioned front and center, generating deal value of US$18.189 billion in the second half of 2016, down 15% from the first half.  Investment volume in the Internet industry rose 3% from the first half, while the single-deal value dropped.

However, investment value and volume in Internet far outpaced those in other sectors. The “Internet-plus” model continued to penetrate into traditional industries. New business models like shared bikes emerged, luring quite a few investors.  Internet was still the number one option for investors in the TMT sector.

As China stepped up approving domestic public listings, the number of IPOs in the second half of 2016 jumped. In the third quarter, 95% of exits in the TMT sector were through IPOs, while the ratio in the fourth quarter also exceeded 60%, making IPOs the major channel for capital to exit the market in the second half.

The proportion of IPOs exceeded strategic sales for the first time since the third quarter of 2015. In the second half of 2016, there were no management buyout or equity transfer cases.

Vincent Cheuk, PwC Southern China Private Equity Leader, said, “As the A-share market is growing steadily amid expectations that regulators will act to expand direct fund-raising and cater to companies waiting in the pipeline for listings, IPOs are becoming the major exit channel. As long as the momentum is sustained in China’s capital market, this trend will last for quite a long period of time.”

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