PE adapts to China's new normal
China's economy grew at its slowest pace in 24 years in 2014 with GDP expanding by 7.3%. Most economists regard the current situation as a symptom of a “new normal” as China continues its transition from the world’s factory to the world’s most attractive nascent consumer market. Indeed, most PE industry professionals envisage no detrimental impact on their pace of investment.
Private equity in China certainly enjoyed a more bountiful 2014 than the economy as a whole. Assets under management blew past the $200 billion mark as Chinese GPs added another $25 billion of fresh capital.
In terms of investment, AVCJ Research has records of 743 deals worth more than $34 billion, a near $14 billion gain on 2013. These data exclude capital that Chinese private equity firms invest outside of China. Cross-border deals amounted to $7 billion in 2014.
My sense is that Chinese private equity is healthier today than it was even a few years ago and there are plenty of opportunities for investors to target.
- There seems to be less competition from upstart renminbi-denominated funds run by unqualified opportunists. Sure, a few popping up every now and then, but not at the rate that threatens to disrupts the market, as was the case a few years back.
- The Chinese PE industry is slowly building its own ecosystem. There is now not only a healthy mix of international and local funds but also a diversified blend of funds targeting different investment themes from early-stage angel funds to turnaround funds. The country is also spawning its own strain of LPs as insurance companies slowly enter the fray.
- Chinese corporations are also embracing PE and VC as competitors and partners. It is used to be that Chinese companies were either funded by PE or purchase exiting portfolio companies. Now we see companies creating their own venture divisions.
- Exits are on the rise, or at least they are in certain areas. The bumper Alibaba Group IPO is representative of the massive demand for VC investments in the country. The success of the first and second-generations start-up is also spawning a new breed of entrepreneurs looking to do build their own businesses.
These are just a few of the many reasons why Chinese private equity will perform under the new normal. However, as we all know, challenges remain and more will undoubtedly emerge. This is still a comparatively young market.
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