Investment in TMT industry reaches turning point in 2018

Shanghai, 17 October 2018 - Private equity and venture capital (PE/VC) investment in Telecommunications, Media and Technology (TMT) over the first half of 2018 saw value remain steady, despite a reduction in deals from the prior quarter, according to the MoneyTreeTM Report released today by PwC. The TMT sector continued to play a key role, with related investment accounting for 50% of the total PE/VC investment over the period, excluding one-time cases.

The MoneyTreeTM Report highlighted that 2,096 PE/VC deals were clinched in the TMT sector over the first half of 2018, down 17% from the second half of 2017. In the first half of 2018, there were 1,400 deals that disclosed financial terms, which collected a total of US$36.255 billion. There were 56 large-size deals, involving a single deal value over US$100 million. While the number of large-sized deals was almost unchanged from the second half of 2017, the total investment value edged up slightly. Additionally, average value per deal of the large-sized deals exceeded US$400 million.

Jianbin Gao, PwC China TMT Leader commented: “In the first half of 2018, China stepped up efforts to encourage innovation and entrepreneurship with a series of supportive industry policies.  Over this time private equity and venture capital investors boosted investment in optoelectronics, integrated circuit and IC design, digital content as well as manga, anime, and game sectors. High-quality projects with strong growth potential and good prospects for exit were still the most favored by investors. On the other hand, after a frenzied 2017, PE/VC began to show signs of reaching a turning point this year, as regulators strengthened supervision over financial markets. Due to tight money supply and lackluster capital market performance, investors became more cautious.”

All four sub-sectors in the TMT industry saw a decline in the number of PE/VC deals amid the weakening overall environment in the first half of 2018. Internet and mobile Internet, as well as Technology sub-sectors remained active, with 966 and 872 deals respectively in the first half. Notably, the investment value in both sub-sectors rose. With 238 deals in the first half of 2018. Meanwhile, the Entertainment and Media sub-sector continued to see its appeal for investors dwindle since hitting a peak in first half of 2017. The Telecommunications sub-sector saw just 20 deals, and became the only sub-sector without a US$100 million deal over the period.

In the first half of 2018, the number of PE/VC deals involving startup companies accounted for 54% of the total for TMT, the highest among all categories. Companies in the expansion phase received the most investment, with deal value accounting for 42% of the total of the TMT industry. The number of first-round deals in the industry was almost unchanged from the second half of 2017, with the proportion of first-round investment value remaining at a historical low. The Internet and mobile Internet sub-sector was still the favorite among investors, attracting 47% of the total first-round investment. However, the total investment value fell 56% from the second half of 2017.

Charline Ni, PwC China Technology Leader, said: “With the introduction of the ‘Guiding Opinions of the State Council on Deepening the Development of the Internet Plus Advanced Manufacturing Industry to Foster Industrial Internet’ in the first half of this year, together with second-phase fundraising of the National IC Industry Investment Fund, investors were increasingly interested in related fields.  These included integrated circuits, robots, smart manufacturing, cloud computing, fifth-generation mobile communications, AR/VR, artificial intelligence, as well as hardware and software products. Although the Internet-based new retail concept gained popularity, themes became increasingly diversified, with the average single deal value dropping to US$1.25 million in the first half of this year. In general, PE/VC investors became more cautious as they responded to regulatory policies with a focus on small-value deals and strategies to diversify. As a result, investors are now exploring new growth opportunities in the TMT industry.”

After a wave of exits by PE/VC investors in 2017, the number of exits in the first half of 2018 dropped significantly. M&As once again became the main exit channel, accounting for 47% of all exits, followed by equity transfers and IPOs, each accounting for 26%. However, since the end of last year, it has become more demanding for listing candidates to successfully pass the regulatory review required for IPOs in the Chinese mainland. Consequently, unqualified companies have withdrawn their listing applications or chosen to list overseas. Concurrently, the Hong Kong Stock Exchange announced new policies that have attracted a number of unicorn companies to go public there, advancing Hong Kong’s status as a hot destination for IPOs.

Vincent Cheuk, PwC China South PE Leader, stated: “In the first half of this year, nearly 70% of A shares and H shares fell below their IPO prices. In the secondary market, investors’ expectations for business models, profitability, compliance and growth prospects of new companies differ from those of early-stage investors. As a result, there has been added pressure for PE/VC investors in the process of exits. Looking ahead, investors in the TMT industry face several challenges for the remainder of 2018. These will include strengthened supervision over financial risks, operation compliance and taxation for equity funds. As a result, TMT companies will need to adapt to a transitional period with new growth opportunities, while embracing positive competition under the guidance of regulatory policies. In the long run, we believe that these adjustments will have positive benefits that will help underpin steady development of PE/VC and startups.”

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