Investment and deals into venture capital (VC)-backed companies declined further in the first three months of 2016, due to market uncertainties and slowing VC activities in China, finds a recent report on global investment trends.
Global economy concerns and a decline in global valuations have seen investors take a cautious, selective approach. Q1 2016 saw USD25.5 billion invested across 1,829 deals, down from USD 27.7 billion and 1,907 deals in Q4 2015, according to Venture Pulse, the quarterly global report on VC trends published jointly by KPMG International and CB Insights.
Q1 2016 was also challenging for the China market. Although deal volumes increased slightly to 85 from 78 in the previous quarter, investment declined 45 percent to USD4 billion, around 40 percent of its USD10.2 billion record set in Q3 2015.
Irene Chu, Partner and Head of the High Growth Technology and Innovation Group, KPMG China, says: “The decline in China VC activities in Q1 was driven by a more cautious investment climate, decrease in mega-deals and average deal size. Meanwhile Chinese VCs are starting to go out and invest overseas. There has been a much stronger push from the central government for Chinese investors, especially large corporate investors, to look internationally for opportunities to help strengthen ecosystem.”
The report highlights that M&A is becoming an increasingly attractive exit strategy as IPO exits in China remain difficult for both investors and founders. Chinese companies are also pursuing M&A and other investment opportunities in the United States. International VC investors accounted for 27 percent of investment in US based companies, in Q1 2016, compare to 17 percent in Q4 2015. Of these international participants, China-based VC investors came second only to those from the UK.
Meanwhile, investment activities in digital health bucked the broader market trend, with a 49 percent increase in investment to USD1.7 billion, the report notes. The US topped the chart in this sector - USD1.4 billion in 84 deals, followed by China - where 10 deals were concluded with total investments of USD121.6 million.
As a number of countries strive to improve the quality and reach of their healthcare systems, digital health sector remains attractive to investors, also due to diversified acquisition and exit routes. Lyndon Fung, Partner, U.S. Capital Markets Group, KPMG China, concludes: “In the future, we expect to see more buyout activities and consolidation in China. We also expect to see a lot more corporates setting up VC arms to make venture type investments in order to get in the game.”
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