PE tech boom: High stakes

Until 2014, China had seen no more than five rounds in excess of $100 million in any one year, according to AVCJ Research. In 2014 there were 17, and there have been 19 so far this year.

Last year, Chinese smart phone maker Xiaomi and Indian online marketplace Flipkart each raised over $1 billion from investors. The biggest deal from the first five months of 2015 is listings and group buying platform Dianping, which received $850 million from Tencent Holdings, FountainVest Partners, Temasek Holdings, Xiaomi, Wanda Group and Fosun Group.

While the rankings are dominated by China and India, they are not minority growth deals across the board. KKR, for example, has participated in a $170 million round for China-based used car trading platform Uxin, but also agreed a buyout of Korea's Ticket Monster. Meanwhile, Canada Pension Plan Investment Board (CPPIB) provided $199.5 million in PIPE funding to Hong Kong Broadband.

These anomalies have contributed to a situation in which the TMT share of overall Asia private equity deal flow stands at a record 28%, up from 16% for 2014 as a whole, but they are not the driving force. That is China. More money has gone into TMT deals since the start of the year than into any other sector - $4.58 billion to $4.52 billion. This has never come anywhere close to happening before; last year's total was 81% non-TMT and that was a record low.

Slower general deal activity in China is a contributing factor, which is blamed by many on the strong public market valuations filtering through to the private markets. But investors are still willing to do business in the TMT space, in some cases at valuations in excess of $1 billion.

Needless to say, the participants in these bumper rounds are not just traditional VCs. Close to 50 different disclosed investors feature in the China deals of $100 million or more. Eight are strategic players; about a dozen are private equity, although some are regular tech investors; and there is a scattering of sovereign wealth or government-linked funds and hedge funds.

This is not a new trend but it now appears to be on steroids as investors of all stripes try and share in the mobile internet growth story. Depending on whom you ask, we are now witnessing excesses akin to the dotcom bubble era or a rationale response to an opportunity that is bigger and more sustainable than 15 years ago.

There is an expectation angle. A hedge fund dipping into the private markets for a pre-IPO round might be satisfied with a 15-20% gain on exit. The risk is higher for a private equity firm entering a Series C round for a start-up that has yet to establish itself as the long-term winner in a changing market, and where an exit - whether IPO or trade sale - may be some years off.

Investors are writing bigger checks and playing for higher stakes; it can't work out well for everyone.

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• Topics
• Technology
• Expansion
• Greater China
• TMT
• Growth capital
• Consumer
• China