Private Equity deal-making continues, China continues to expand
Hong Kong, 30 March 2012 – According to Ernst & Young’s annual study Global Private Equity Watch – a return to entrepreneurship 2012, momentum for deal making in China continued in 2011 despite the global decline. Aggregate private equity (PE) deal activity rose significantly in the fourth quarter of 2011, in sharp contrast to global trends. Moreover, despite valuation concerns founded in increasingly robust competition for deals among local and global PE firms, deal-making continued unabated. The aggregate value of PE deals in 2011 rose to US$20 billion — an increase of 48% as compared with 2010 figures. In 2011, there was a small decrease of 7% in PE deal volume with 640 deals, compared with 687 deals in 2010.
Activity in China continues to expand, with growth in PE deal activity supported by an increasing supply of local PE capital and the availability of exit alternatives. Robert Partridge, Transaction Advisory Services Leader of Greater China at Ernst & Young says, “Unlike India, where PE deal activity is driven by global firms, China has an increasing number of domestic firms that are competing for PE deals, including 8 of the top 10 PE deals in China in Q4 2011.”
The number and size of large PE deals (those with reported values of higher than US$50 million) are increasing as Chinese companies continue to capitalize on the country’s economic trajectory. Q4 2011 saw a total of 29 PE deals with values topping US$50 million recorded, the highest quarterly number to date. On a yearly comparison basis, large PE deals have also significantly increased in number — by 50%, from 44 in 2010 to 66 in 2011.
Consistent with global trends, PE-backed IPOs experienced a significant decline in the second half of the year. Just four PE-backed IPOs priced in H2 2011, compared with 33 in the second
half of 2010. For the entire year, PE-backed IPOs declined by 60% in 2011, from 47 to 18.
Meanwhile, trade sale and secondary buyouts also declined in Q4 2011 to just six, compared with 19 in Q4 2010. Over the whole of 2011, the number of exits by these routes fell from 50 in 2010 to 41. However, values were significantly up, rising from US$4.3 billion to US$8.8 billion, as several large deals were orchestrated by PE firms, the largest of which was the US$1.7 billion
sale of Hsu Fu Chi by Baring Private Equity to Nestlé.
PE fund-raising in China did decline by 11% from US$32.1 billion in 2010 to US$28.5 billion in 2011. The second half of 2011 witnessed new commitments totaling US$8.6 billion, just half that in the first half of the year. However, limited partners (LPs) and general partners (GPs) remain focused on Asia Pacific and China in particular as local currency PE funds continue to expand. Renminbi (RMB) funds experienced a 28% year-on-year increase in their aggregate value to US$11.4 billion in 2011, demonstrating that local investor participation in Chinese PE is on the rise.
Entrepreneurial spirit is key to PE’s staying power
Other findings from the report include examples of how PE firms have demonstrated their entrepreneurial ability to respond to severe economic volatility, a consequence of the global recession.
Eva Ip, Managing Director of Transaction Advisory Services at Ernst & Young comments, “These behaviors were critical to overcoming the economic challenges and enabled value creation on behalf of their investors. This entrepreneurial approach is a key element to the industry’s future success.”
Looking forward to the rest of 2012
Partridge says, “The outlook for PE-backed IPOs is heavily dependent on external factors such as the stabilization of Europe, improved growth prospects for the US and increased investor confidence in Asia. With improved operating results at many PE portfolio companies, many sponsors are watching closely for signs of the IPO window reopening and have been working diligently to prepare their portfolio companies for a public equity exit. However, the challenges remain around how to locate the best deals and finding good opportunities to exit existing portfolio companies.”
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This news release has been issued by Ernst & Young, China, a part of the Ernst & Young global network.