SMEs' shortage of funds boosts PE/VC firms

Difficulties are hitting companies hard, according to industry experts

HANGZHOU - The current difficulties being encountered by small and medium-sized enterprises (SME) in securing bank loans amid tightened monetary policies are providing more bargaining power for private equity and venture capital (PE/VC) companies when striking deals.

In the face of severe financial pressures, many SMEs have lowered their valuations and become more open to equity investments. The VC/PE outfits, in return, are now "calmer" when assessing investments, and are able to buy stakes at a lower price, according to industry insiders.

"The mentality of companies and private equity firms has totally changed," said Hu Xiong, executive deputy general manager of Shanghai Chengding Venture Capital Co Ltd, a private capital company. "In the past, VC/PE firms chased companies. Now the companies are chasing the VC/PE firms."

Yu Wenchao, deputy investment director at Shenzhen-based CDF Capital Co Ltd, said that at present he will not pay a price-earnings ratio higher than 10 for equity investment, while just a year earlier ratios higher than 15 were widespread.

The Chinese central bank has tightened its monetary policies significantly since last year, including raising benchmark interest rates and the reserve-requirement ratio, to fight surging inflation and deflate property bubbles.

Left with less capital to lend, banks have raised interest rates for SMEs, which they are already reluctant to lend to. As a result, the SMEs now have little bargaining power over lenders because of a lack of fixed assets and poor credit records.

September saw the lowest amount of new yuan lending in almost two years at 470 billion yuan ($74 billion).

Fang Fenglei, a Chinese partner at Goldman Sachs Group Inc, pointed out that one important way for SMEs to obtain funding is through the VC/PE industry

According to the VC/PE industry consultancy Zero2IPO Group Research, the number and amount of VC/PE investment in China hit a record high in the third quarter. Investment surged 128 percent year-on-year to approximately $3.4 billion. The only 60 VC/PE companies allowed to make investments in China raised a record $9.5 billion in the third quarter, double the amount in the same period last year.

Zhuo Fumin, a partner with GGV Capital Co, said that China's VC/PE industry has reached a turning point.

"Many companies offered single-digit price-earnings ratios in negotiations. Some that otherwise didn't need financing are now eager to sell stakes to raise capital," he said.

"The current economic climate is a good time for VC/PE outfits to flex their muscles."

On Monday, Wang Guowei, assistant chairman of Wenzhou Makepower Electronics Co Ltd, was busy visiting private equity managers at the Second China Zhejiang Growth Enterprise Financing Conference, which was attended by more than 1,000 SMEs and 400 PE/VC companies.