2Q analysis: Flattering to deceive?

1) Investment: China up, the rest down

Alibaba Group was responsible, directly and indirectly, for close to 30% of non-real estate private markets activity in Asia during the second quarter of 2016. It adds credence to the notion that at a time of uncertainty - for China and the region from a macroeconomic perspective, and for China's technology sector in particular - investors are flocking to "start-ups" with blue-chip backing.

First, Ant Financial, Alibaba's online financial services affiliate, completed a $4.5 billion Series B round of funding at a valuation of $60 billion. The investor group includes China Investment Corporation, China Post Group and various local insurers. Next, Alibaba acquired $2 billion of its own stock as SoftBank sold $8.9 billion worth of shares in the e-commerce giant, with GIC Private and Temasek Holdings (defined as private capital providers by AVCJ Research) each picking up $500 million. Finally, Alibaba and Ant Financial contributed $400 million to the latest funding round raised by ride-hailing service Didi Chuxing.

The Didi round is thought to tie with Ant Financial as the largest-ever fundraise by a private internet company globally. In addition to the $4.5 billion in equity - which values the company at $25 billion - there was $2.8 billion in debt provided by local lenders. Apple, China Merchants Bank, Tencent and Softbank all contributed capital, with Chinese insurance companies once again featuring prominently.

Local money is increasingly finding its way into large-cap Chinese private equity transactions. This is not only because companies - whether established players being taken private in the US or start-ups moving rapidly through the rounds - are targeting domestic IPOs; the valuations and transaction terms these institutions are willing to accept are generally more accommodating to founders than those proposed by foreign private equity players.

It is unclear exactly how much of the $20.2 billion that went into PE deals in Asia between April and June came from Chinese institutions with relatively low returns expectations and the capacity to write large checks. Suffice to say, in a quarter when investment dropped to the lowest level seen since the final three months of 2013 - according to provisional data from AVCJ Research - China received $14.2 billion of the total deployed; 90% of that was in early and growth-stage deals, with Ant Financial and Didi Chuxing accounting for 63% between them.

The China share is disproportionately high - it has surpassed 50% only twice in the previous 12 quarters - because the other markets are so low. Deal flow in US-dollar terms fell by well over 50% quarter-on-quarter in Australia, Japan and South Korea, as buyouts across the region slumped to $1.8 billion, the lowest since early 2010. Indeed, the largest announced buyout during the second quarter was The Blackstone Group's acquisition of a majority stake in India-based IT services business Mphasis, at a paltry $380 million.

Investment for the first half stands at $46.1 billion, down from $68.6 billion in the final six months of 2015.

2) Fundraising: VC papers over the cracks

Despite multiple signs that the long-lingering bubble in China's technology sector is beginning to deflate, demand for venture capital exposure remains high, based on provisional fundraising data for the second quarter of 2016. Eleven VC managers achieved closes during the period, including five of the 15 largest fundraises, for a total of $2.4 billion. This compares to eight closes and two of the top 15 in the previous quarter, contributing $1.2 billion.

Indeed, the first quarter figure now looks like a blip in a strong vein of VC fundraising, as opposed to a harbinger of doom. What has changed is the venture contribution to overall private equity fundraising: in previous quarters it tended to account for up to one quarter of the total; for April-June 2016, it stood at more than half.

However, there is a single reason why the venture capital figure looks so good. Sino-US focused GGV Capital raised $1.2 billion on its own across three vehicles that theoretically enable it to support companies all the way from seed through late-stage growth rounds. It points to a new maturity in China's venture capital industry, but few GPs have sought to operate at this scale. Equally notable is the speed at which GGV has returned to market; its fifth fund closed at $620 million in April 2014 and was followed by a $475 million top-up vehicle in 2015.

The spikes in China venture capital fundraising - as well-known GPs tended to return to market around the same time - have previously come in three-year increments. Lightspeed China Partners and DCM also appear to have deployed rapidly. They closed their latest funds, at $260 million and $500 million respectively, two years after raising the predecessor vehicles.

It remains to be seen if more GPs from the class of 2014 reemerge with new funds in 2016. But China is one of only two major markets to record a quarter-on-quarter increase in venture capital fundraising. The other is Singapore, where surging interest in the start-up opportunity across Southeast Asia took capital raising to a record quarterly high of $220 million. Monk's Hill Ventures, C31 Ventures and Golden Gate Ventures were among those to achieve final closes.

Beyond venture capital, the outlook continued to be bleak - as might be expected given the uncertainty about China's growth prospects and those of the global economy. The venture push meant Singapore was the only major market to see an upturn in broader private equity activity.

The initial figure for first-quarter fundraising, $9 billion, was subsequently upgraded to $11 billion as new closes came to light. However, it still represents the lowest quarterly total since mid-2013. As it stands, the second quarter is the worst since the aftermath of the global financial crisis, with approximately 40 managers reaching partial or final closes totaling $6.7 billion.

Combined, the disappointing opening two quarters of 2016 put first half fundraising at $17.7 billion - another multi-year low and less than half the approximately $37 billion committed to Asia-focused managers in each of the previous two six-month periods. Expect the second quarter total to be revised upwards, but not by enough to counter the sense of weakness in the market.

3) Exits: On a downward trend

Private equity exits have been on a downward trend for the past 12 months and this continued in the second quarter of 2016. A total of $7.8 billion was realized, compared to $10 billion in January-March, although the number of exits - around the 100 mark - was largely unchanged. Needless to say, the first-half figure for 2016 is one of the lowest seen in recent years.

Perhaps unsurprisingly, given the level of volatility, public market exits fell by nearly half on the previous quarter, with secondary buyouts also seeing a sizeable drop. At $5.2 billion, proceeds from trade sales were only slightly down, but first-half trade sale activity was the weakest since the last six months of 2013. The acquisitions of India-based Welspun Renewables and Southeast Asian e-commerce business Lazada - by Tata Power and Alibaba Group, respectively - were comfortably the largest transactions. Both delivered exits for minority shareholders.

On the IPO front, there was an upturn in gross proceeds, even if the number of offerings was consistent with the approximately 30 seen in the first quarter. One third of the $3.6 billion raised came from BOC Aviation's Hong Kong offering - in which private markets investors participated as cornerstone investors as opposed to longer-term backers experiencing a liquidity event. However, there were still sizeable partial exits in Tokyo for MBK Partners and The Carlyle Group from Komeda Coffee and Solasto Corporation (formerly known as NIC Corp).

India also continued its recent and much-needed IPO spurt, with $640 million raised through eight offerings. This is the highest quarterly total since the last three months of 2012. Equitas Holdings, Ujjivan Financial Services, Parag Milk Foods and Thyrocare Technologies were among the 12 largest IPOs from across the region, during a quarter in which Chinese companies uncharacteristically did not dominate from a deal volume perspective.

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• Topics
• Greater China
• Southeast Asia
• Fundraising
• Investments
• Buyouts
• China
• Singapore
• Alibaba Group
• CIC
• SoftBank Capital
• Temasek Holdings
• The Blackstone Group
• GGV Capital
• Golden Gate Ventures
• The Carlyle Group
• MBK Partners