EY - Private equity roundup for China

Private equity roundup for China

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China is transforming from an export-led to a consumer-driven economy, propelled by an expanding middle class and continuing urbanization. These secular trends driving China’s growth remain undiminished, despite a short-term slowdown related to economic rebalancing.

PE in China is entering a new era as well. Value creation strategies that benefit portfolio companies are more prominent, and China’s domestic PE industry is rapidly scaling up to tackle increasingly complex and sophisticated deals.

Slower year for fund-raising

PE firms raised US$19.8b in 2013, down from US$28.7b in 2012, with approximately 30% of the total raised by Renminbi (RMB) funds (see chart). Many attributed the slowdown to China’s moratorium on IPOs, as uncertainty around exit timing and liquidity led investors to reduce their intended allocations.

China PE fund-raising, 2012–13 (US$m)

EY - China PE fund-raising, 2012-13 (US$m)

Source: Preqin

Despite the slowdown, high-quality funds continued to be in demand. The year saw final closes from several significant funds – the largest of which was the second-half closing of MBK Partners III. That fund closed with US$2.7b in October 2013, 20% higher than the US$2.25b target set at launch in September 2012.

Take-private transactions central to PE activity

Take-private transactions have been a powerful trend in Chinese PE, and they continued to play a role in 2013.

Smithfield Foods received a US$7.1b offer from PE-backed Shuanghui International Holdings, the largest take-private of a US-listed company ever by a Chinese company. Shuanghui is backed by CDH China Holdings Management, Temasek Investments, New Horizon Capital and Goldman Sachs.

Giant Interactive Group, listed on the NYSE, was also the target of a take-private offer last year by Baring Private Equity and the company’s chairman, Yuzhu Shi.

In total, PE firms announced 161 separate transactions worth US$10.8b in 2013, a decline of 18% from the US$13.1b announced in 2012.

More exits to strategic and PE buyers

With the decision in late 2012 by Chinese regulators to suspend new equities issuance, PE exits were challenging in 2013. IPOs have long been the preferred exit route for PE investors in the region, and the closure of the IPO market forced investors to seek alternative exit options.

Many chose to seek out trade and PE buyers. Between 2012 and 2013, PE exits by M&A more than doubled to US$5.4b.

Although the vast majority of exits went to corporate buyers, PE firms are increasingly looking to PE buyers as another viable exit route.

As the Chinese PE market matures, successive PE owners are able to add value by leveraging different skill sets. Secondary buyouts are set to play an increasing role in providing liquidity and as a source of new deals.