China GPs seek global angles as domestic deployment slows - AVCJ Forum

Rebecca Xu, a co-founder and managing director at fund-of-funds Asia Alternatives, observed that a shift in the risk-return balance has made investors wary of China. Issues such as regulatory uncertainty and geopolitical tensions have led to investors seeking higher returns to compensate for the increased risk. However, the weak post-pandemic economic recovery means returns are limited.

Rather, Xu has seen global investors diversifying their Asian investment portfolios, dialling down China and dialling up markets such as Japan and India – the former offering attractive buyout targets and the latter offering growth. This is in line with the “China plus one” strategy, she said.

MSA Capital started looking at overseas investments in 2018, entering emerging economies such as the Middle East, Southeast Asia, South America, North Africa, India and other emerging economies, noted Jenny Zhang, a founder and managing partner at the firm.

Bluerun Ventures China is also looking overseas. Jui Tan, a managing director at the firm, said that “Chinese companies with comparative edges in the global market” are prioritised. He sees comparative edges in industrial production and internet-driven software design. These skills can be coupled with China’s significant experience in exports to help companies scale in overseas markets.

Another angle involves small and medium-sized enterprises (SMEs) riding on the coattails of large Chinese companies, Tan added. E-commerce platforms like Shein and Pinduoduo could be good partners for emerging payments and logistics players, while Huawei Technologies would be a natural conduit for hardware and software players.

For buyout managers, one strategy gaining traction involves the acquisition and localisation of China divisions from multinational corporations. Eric Xin, a managing partner at Trustar Capital, highlighted McDonald’s China – currently owned by Trustar and The Carlyle Group – as an example of this trend.

He also sees potential on the SME side, notably taking advantage of an expected low interest rate environment over the next 5-10 years to scale them up. Digitalisation tools can play a key role in bringing efficiencies to fragmented industries, Xin added.

Exits remain a challenge for all industry participants with a slowdown in IPOs – especially in overseas markets – a lack of willing strategic investors, and a mismatch in valuation expectations between buyers and sellers.

The era of IPOs dominating China private equity exits has ended, according to Alex Shum, a managing director at secondaries investor TPG NewQuest. He expects to see more GP-led secondary transactions as managers look for new ways to realise returns for LPs. Both GPs and LPs are incentivised to transfer high-quality assets to continuation funds, Shum said.

Yunyan Sang, a vice president at Lexington Partners, another secondaries investor, added that the exit slowdown is not unique to China. Amid geopolitical tensions and macroeconomic uncertainty, institutional investors started to see negative cash flow from their private equity portfolios in 2022, ending 11 consecutive years of positive contributions.

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• Topics
• Greater China
• Expansion
• Buyouts
• IPO
• Trade sale
• Secondaries
• China
• AVCJ Events
• Asia Alternatives Management
• BlueRun Ventures
• MSA Capital
• Trustar Capital
• Lexington Partners
• NewQuest Capital Partners