Private equity roundup for China 2015
2014 was a challenging year for private equity in China. A shift from export to a consumption-driven model has led to lower growth rates. But new opportunities are just around the corner.
After more than 30 years of growth driven by an investment-centric model, China shifts from its manufacturing-heavy roots toward a more balanced economy driven by domestic consumption.
This is key to China’s future growth and stability, but has led to reduced growth. However, the long-term growth rate is still expected to exceed that of the developed markets for the foreseeable future.
This more sustainable growth, China’s increasingly open capital markets, population of 1.3b and rising middle class, continue to make it an attractive destination for PE.
Fundraising activity increased in China over the course of 2014, with US$30.4b raised by funds focused on the country. This represents an increase of 15.7% over 2013.
The success of Asia-focused vehicles in attracting capital shows that investors are interested in well-established teams with a significant local presence and strong track record. A proven ability to return capital in a challenging exit environment will be key to their success.
Acquisitions and exits
Investment activity increased versus last year, despite the challenging macro environment. PE firms announced investments valued at US$14.2b in 2014, a 31% increase over 2013.
One of Beijing’s key reforms in M&A in 2014 was to relax regulatory oversight of cross-border M&A activity, designed to encourage overseas investment by strategic and financial investors alike.
After the IPO moratorium was repealed, exit activity picked up and prompted a new wave of PE-backed deals. Observers expect an increased focus by PE firms on liquidating positions in companies acquired over the last five years.
The China Securities Regulatory Commission (CSRC) is the industry’s primary regulator. One of its first priorities was to bring China’s regulatory framework more in line with other jurisdictions.
Another important development was the relaxation of rules governing M&A. A comprehensive, well-designed regulatory framework is perhaps drawing nearer.
The most significant regulatory development is Beijing’s focus on streamlining state-owned enterprises (SOEs). Many are being pushed to spin off underperforming assets, which increases a universe of attractive companies seeking to partner with PE.
But questions remain concerning the degree of control that the Government is willing to cede to outside investors, the sectors likely to see the most activity, and the alignment of incentives.
The increasing importance of China as a key driver of the world’s economic growth has been one of the defining macro trends for the last decade. However, now is a time of significant change, as China seeks to evolve from an economy dependent on manufacturing exports to one driven by domestic demand.
PE activity across China remains robust. Firms continue to raise new funds, and significant deals continue to occur. China remains rife with opportunity.
The challenge, as always, lies in its identification. PE firms with well-defined and well-articulated strategies predicated on adding lasting and tangible value will be those that most benefit from China’s new direction.