Jointly organized by Deloitte Touche Tohmatsu (DTT) and Deloitte & Touche Corporate Finance Ltd (DTCFL), and conducted between August 26 and September 13, the VC confidence survey questioned 25 VCs in Hong Kong and on the Chinese mainland.

Survey subjects had assets under management of up to US$1 billion.

"Only 16 percent of respondents plan to invest over two-thirds of their total funds in new investments, while 24 percent plan to invest one-third to two-thirds of their total funds in new investments in the coming six months," said Lawrence Chia, Managing Director of DTCFL.

"This is a significant drop compared to the 26 per cent and 42 percent respectively in our second-quarter (Q2) survey results," added Chia

The third-quarter (Q3) survey shows that although 80 percent of respondents do not expect a further deterioration in the economic climate during the coming six months, the overall expectation is less optimistic than it was in Q2, with only 24 percent of respondents expecting an improvement (Q2: 45 percent).

This less optimistic view on the economic outlook has also taken a toll on the exit valuation expectations of the VCs.

Although still close to 50 percent of the respondents expect exit valuations to remain the same in the coming six months (Q2: 54 percent), the proportion of respondents expecting a decrease in exit valuations has risen to 29 per cent (Q2: 19 percent).

These findings fall in line with the responses of US-based Silicon Valley VCs, 34 percent of whom expect a decline in exit/entry multiples, and London VCs, of whom 54 percent expect a drop.

The survey also shows a sharp increase in VCs who would choose mergers and acquisitions (M&A) as a way to exit their investments. This quarter, the majority (72 percent) of respondents expect to exit more of their investments through M&A rather than through initial public offerings (IPOs), a significant change from just 26 per cent in Q2.

"Although this market orientation may be caused by the poor stock market performance recently, I believe that it also reflects a situation where China has become more attractive to global players," Chia said.

According to Chia, through M&A and joint ventures, these global players can accelerate their expansion into the Chinese mainland market. This is especially true because of China's accession to the World Trade Organization last year, and because restrictions on foreign investments in various sectors in China are expected to be reduced over the next few years.

A total of 60 percent of respondents expressed an increased appetite for investment in China, according to the survey.

Consistent with Q2 results, Internet security, biotech and life sciences, semiconductors and mobile and wireless remain the hottest sectors.

(China Daily November 4, 2002)