China PE investors prioritize long-term development - AVCJ Forum

Investment in China slowed over the course of 2018 as government efforts to ease the debt burden held back economic growth. This contributed to a decline in consumer sentiment that was exacerbated by plummeting domestic stock markets – though they have rebounded this year – and increasing antagonism between the US and China over trade.

“If I were standing in 2017, I would not have guessed all of these things would happen. But would I have made the investments we made in 2016-2017? Certainly. As private equity investors, we look at fundamentals and growth. We build in long-term growth and operating potential,” David Wong, a partner at PAG Asia Capital, told the AVCJ China Forum.

For PAG, the primary concern is the speed with which China opens up more of its economy to private investment and takes action to promote private enterprise. Deregulation is complicated by the broader transition from investment and export-led growth to a consumption-driven model and from manufacturing to services. As a result, progress has been slower than many had hoped.

“The government has a lot of good policies, but deregulation is hard – it has been two steps forward and one step back,” said Eric Xin, a managing partner at CITIC Capital. “We have yet to see the full impact of deregulation, and in some areas, such as healthcare and education, regulations have become tighter.”

Even as new opportunities emerge, private equity investors must adapt to a China in which they cannot count on strong macro tailwinds. This has prompted KKR to concentrate on sectors that are likely to benefit from structural growth, such as healthcare and education. These are long-term plays, but Paul Yang, the firm’s China head, observed that trade tensions could point to a wider economic shift that would have a lasting impact on the investment environment.

“Companies are increasingly focusing on high-end tech from artificial intelligence to cloud services to big data. There is a risk that the world decides to go its separate ways,” Yang said. This conjures up images of the previous impasse between the US and the former Soviet Union, but the stakes are higher this time because there is so much commercial interaction between the US and China.

“If we cannot find a way to cooperate on 5G there will be no 5G,” Yang added. “We have to figure out a way to work together.”

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• Topics
• Greater China
• Buyouts
• Expansion
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• China
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• KKR
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