China to see record PE deal flow in 2013 – PwC

"Deal activity is likely to strengthen from the second quarter of 2013 as global economic conditions hopefully become more settled, pricing expectations adjust, IPO markets re-open, and China's leadership transition takes effect - we believe that 2013 will be a record year for PE in China and there are very strong tailwinds for the PE industry in China over the medium term," said David Brown, PwC's Greater China private equity group leader.

Private equity's position as a source of growth capital has been bolstered by continued government support for the asset class. However, PwC expects this role of capital supplier to a capital-starved private equity to expand to include more buyout opportunities.

Consumer, clean energy, agriculture, media and entertainment, technology and healthcare are often cited as target industries - largely because of their perceived ties to policies outlined in China's 12th Five-Year Plan - but in practice most private equity investors are seen as industry agnostic.

A tougher fundraising environment is expected for China-focused funds, particularly those in the renminbi space - AVCJ's analysis indicated this had been coming since early 2012 and it really hit home in the third quarter - which should lead to a degree of industry consolidation. A lot of funds also have a backlog of portfolio companies that need to be exited, so many, in fact, that even if the IPO market picks up it will be unable to cope with demand.

"The industry as a whole is moving into an ‘exit phase,'" Brown said. "The backlog of exits represents a real challenge for the sector; it is more than IPO markets can absorb, and trade and secondary sales will become more frequent."

The days of multiple arbitrage when investors could throw money at deals and see strong public market returns, are gone, Brown added. Due diligence is vital and fraud risks are high, which means private equity firms should be prepared to walk away from deals if they are uncomfortable.

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• Topics
• Investments
• Greater China
• Fundraising
• Exits
• PwC
• China
• Fundraising
• buyout
• Growth capital
• Exit