
Changing China: Economics and private equity
The phrase "new normal" has been used so frequently with regard to China’s economy in recent years that one wonders when it might reach its sell-by date.
In a macroeconomic context, China's new normal is incremental stopping points on the path from fixed-asset investment and export-driven growth to a reliance on services and domestic consumption. But the phrase could equally be applied to the country's private equity industry. Changes in the economy and demographics signal a new genre of deals.
So far in 2015 investment is on a par with the past two years but there is been a significant shift in the nature of deal flow. Information technology has emerged as the driving force with substantial transactions involving entertainment listings and group-buying site Dianping ($850 million) and mobile-based taxi-booking platform Kuadi Dache ($600 million, prior to its merger with rival service Didi Dache).
There is a similar dislocation in fundraising, with the government-linked RMB30 billion ($4.8 billion) Green Ecological Silk Road Investment Fund dominating the rankings. It threatens to obscure true institutional activity, with CITIC Private Equity and Sequoia Capital raising their latest vehicles. Banyan Capital, a spin-out from IDG Capital Partners, also made a sizeable contribution, closing its second fund at $362 million and then raising a $100 million co -investment fund. It is worth noting that all three of these GPs are very active in the technology space.
The new normal also preoccupies global investors, who consider both the macroeconomic ramifications as well as the impact on private equity. It is a recurring theme at industry conferences - including AVCJ's own events - often followed by observations that China private equity has lost its shine in the eyes of some LPs, last year's uptick in exits notwithstanding.
For example, I was recently in Washington D.C. for the emerging markets-focused Global Private Equity Conference organized by the International Finance Corporation and our friends at EMPEA. A few years ago, this event was full of delegates from China but the 2015 iteration featured just a handful. By contrast, there were a huge number of Indian delegates.
Indeed, some attendees speculated aloud that China has fallen from favor. It is difficult to draw definitive conclusions - if anything, as the global LP community becomes more familiar with China, people forming their own opinions rather than going with the herd. Overall, there still seems to be strong interest, based on the conversations I had on my trip.
An interesting development is that a number of firms are looking at new ways of addressing the China market. A senior partner of a top US-based buyout house told us about a partnership his firm has formed with a successful Chinese renminbi-only manager that wants to expand into the US dollar fund space.
The new normal is not necessarily a concept to be feared. It emblematic of a market that is undergoing a significant transition and the opportunities it presents are different from what we've seen in the past.
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