Although overall growth is expected to slow in 2012, China’s private equity (PE) sector will continue to thrive. The penetration of PE in China, measured by the total annual flow of PE funds as a percentage of GDP, is only 0.1%, as opposed to 0.8% in the US and 2% in the UK, but McKinsey predicts the figure will jump fivefold during the next five years.
“2011 is likely to be a record year for China PE in terms of both funds raised and deal levels,” said PwC in a media roundtable last week. PE fundraising for China investments peaked at $34.8 billion in 2008, followed by a dramatic decline to only $13.5 billion in 2009. However, the number recovered quickly to $26.9 billion in 2010 and surpassed last year’s total during the first three quarters of this year ($28 billion).
China’s share of the world’s total fundraising has also gone up, from only 4% in 2004 to 31% in 2010.
The domestic PE industry has emerged strongly during the past three years, with renminbi-denominated funds now accounting for 76% of total PE fundraising in China, compared to 17% in 2006. “One of the principle reasons is that those companies [small and medium-size enterprises] in the China economy are quite capital constrained,” said David Brown, partner at PwC, explaining the reason for the emergence of China’s PE sector. “It has been difficult for them to get bank borrowing in the last three or four years.”
However, although the number of PE deals has approached a record high in the first three quarters this year, China represents only a small portion of the total value of global deals. “It is still difficult to find big deals in China in excess of a billion dollars,” said Brown.
While clean energy and technology are typical topics in the PE industry, deals are actually broadly spread over sectors, according to statistics provided by PwC.
China’s PE industry prefers to exit markets through IPO — more than 70% of exits in 2010 were by IPOs, compared to 10% to 15% globally, said Brown. In 2010, there were more than 200 PE-backed IPOs of Chinese firms, which is more than any other market globally.
Deals and exits in China’s PE sector have been unbalanced since 2005, during which time there have been twice as many as deals as exits. This year, there were 394 deals and only 174 exits in the first three quarters. “The selling line lags behind,” Brown added.
In China, PE investing is different to the rest of the world. It aims to provide fast-growing firms with extra capital to expand, rather than taking over underperforming businesses and restructuring them, according to a report recently published by China First Capital.
The hardest part of PE in China is finding a good company, while in the US and Europe big challenges in restructuring plans just start after discovering good investment opportunities, said China First Capital in the report.