The private equity (PE) market in the Greater China region is compelling for investors looking to capitalize on the region’s growth. Despite the global economic disruption, China posted a GDP growth of 2.3% in 2020. Moreover, its private capital sector has total assets under management (AUM) of US$1.3t, which is expected to expand further with proactive government efforts to strengthen regulatory frameworks and establish a formal financial system.
The Greater China region is becoming increasingly accessible to private investors:
- The introduction of Foreign Investment Law, Catalogue of Encouraged Industries, and the launching of various free trade zones provided attractive ways for foreign investors including PE to access the broader fast-growing industry sectors.
- Hong Kong’s Limited Partnership Fund Ordinance adopted in Aug 2020 has facilitated the establishment of funds onshore in Hong Kong in the form of limited partnerships. This is expected to boost Hong Kong’s standing as an asset management and PE investment centre in Asia. In addition, the Hong Kong SAR government has introduced the tax concession regime for carried interest in early 2021 to enhance attractiveness to PE investors.
However, while the PE opportunities abound, China’s changing regulations on a few industries as well as the impact on Chinese companies to list on overseas stock exchanges are critical challenges industry players face.
Key emerging themes impacting Greater China’s PE landscape include:
1. The new regulations launched by Chinese Government has undermined business model of certain industries and suspended overseas listings by domestic companies.
In Jul 2021, the Cyberspace Administration of China (CAC) proposed draft rules calling all data-rich tech companies with over one million users to undergo security reviews before listing overseas. Chinese regulators‘ scrutiny and new legislation could be a headwind for companies attempting to list on overseas stock exchanges and will likely push more high-profile offerings onto domestic and Hong Kong-based exchanges. Concurrently, U.S. Securities and Exchange Commission (“SEC”) has required Chinese issuers to disclose material risks related to their operations in China, further adding complexities and creating uncertainty over exit timelines.
Notably, the Hong Kong Exchange (HKEx) has outlined rules for IPOs by Special purpose acquisition companies (“SPACs”)and Beijing opened new Stock Exchange (“Beijing Stock Exchange”) to be a major base serving innovative small and medium sized enterprises. Both provide alternative exit opportunities to PE portfolio companies in the region.
2. Investors expected to shift focus to sectors less prone to regulatory impact and identify opportunities in the sectors that are aligned with China’s regulations
Technological innovation is in the spotlight of the 14th Five-Year Plan (2021-25). Investors are expected to shift focus to the core technologies, covering key sectors such as semiconductors, 5G applications, the Internet of Things, and autonomous driving.
3. China’s blueprint for national development is pushing Environmental, Social Responsibility and Corporate Governance (“ESG”) into the mainstream investment focus
In 2020, China announced its climate targets to be carbon-neutral by 2060. According to BNP Paribas, to achieve the goal of economic transformation to sustainable development, an investment of approximately US$247-468b will be required each year, and 90% of the capital may be from the private sector.
4. Artificial intelligence/machine learning (AI/ML) and 5G expected to garner continued PE interest in the region
The ubiquity of mobile payment systems and the advent of advanced digital infrastructure have paved the way for companies focused on next-generation technologies such as 5G and AI/ML. According to GSMA Mobile Economy Report 2021, Greater China alone will account for nearly half of the total 5G connections (48%) by 2025, way ahead of the global average of 21%.
Notes: *Analysis includes PE funds which are closed, fully invested, liquidated or in the divestment phase. It includes funds with an investment mandate to deploy capital in the Greater China region.
Source: AVCJ, EY analysis