3 minute read 18 Nov 2019
Jinli street Chengdu Sichuan China

How US-China trade relations are impacting PE investment

By Andres Saenz

EY Global Private Equity Leader

Trusted advisor to leading private equity professionals and their portfolio companies. Ardent student of consumer behavior. Marathoner. Family man.

3 minute read 18 Nov 2019

Investor optimism remains intact for both US and China amidst dynamic trade equations.

In July 2018, US President Donald Trump launched the first in a series of actions in what would become a protracted trade dispute between the US and China. To date, the US has imposed tariffs on US$550b worth of Chinese products. China, in return, has set tariffs on US$185b worth of the US goods; both sides have furthermore announced potential qualitative measures that will affect US businesses operating in China.

While recent discussion and a planned summit between Trump and Xi has spurred hopes that the meeting will restore some level of normality to trade relations, it remains a fluid situation.

Both US and China activity remains resilient 

Commentators have wondered to what degree these issues might challenge PE activity in both regions. Thus far, domestic activity in both the US and China remains robust. While the overall value of China PE deals have fallen by more than half in 2019, the bulk of the decline can be traced back to a single large deal last year - a US$14b investment in Ant Financial. 

Overall, China’s PE investment activity has been resilient. Based on the degree to which the bulk of China’s PE activity is focused on the domestic consumption story, it’s perhaps not surprising.

One area where trade tensions may be having an impact is on the fundraising side. According to research published by Preqin, capital raised by China-focused and headquartered firms fell to just US$54b in 2018, a decline of nearly 65% compared with 2017.

China fundraising

US$54b

in capital raised by China-based PE funds last year.

Nonetheless, there are a number of prominent China-based funds currently raising capital-- in aggregate, 142 funds seeking US$38b in commitments from investors. Included amongst them are many top-tier names, reportedly, including Primavera Capital Group, which is targeting US$2.8b for its third fund, and CDH Investments, which is looking for US$2b for its sixth fund.

From a sector perspective, tensions are having some of their most visible impacts on investment in the technology sector. According to S&P Global, in 2018, investments by Chinese firms in the American semiconductor and technology hardware segments dropped to just US$203m, a fifth of the prior year’s activity.

Investors remain enthusiastic despite the challenges

Looking forward, global investors remain enthusiastic on China’s opportunities. Streamlined regulations and the further opening of markets are expected to present significant opportunities for companies looking to create or expand their presence in China, and vice versa. And initiatives currently underway, such as the development of the Guangdong-Hong Kong-Macau Greater Bay Area (GBA) are expected to unlock significant growth potential for PE firms and other investors.

We expect the economic miracle in the Yangtze delta river in attracting foreign investments to repeat once again in the GBA.
Tony Tsang
Private Equity Leader, Greater China Strategy and Transactions

The GBA represents a collaborative initiative to economically and socially integrate the nine cities in Guangdong’s Pearl River Delta, as well as Hong Kong and Macau, to create a unified and connected hub of commerce and innovation.

Says Tony Tsang, Private Equity Leader, Greater China Strategy and Transactions, “The Greater Bay Area is one of the top central government initiatives for the next stage of development. We expect the economic miracle in the Yangtze delta river in attracting foreign investments to repeat once again in the GBA. Global PE firms, many of which have regional headquarters in Hong Kong, are well positioned to capture the benefits, including opportunities in the technology, advanced manufacturing and healthcare sectors as well as from the further opening up of the financial service sectors.”

The coming years will see increased migration of talent into the GBA, which in turn will drive the development of entrepreneurship and more investments in smart city initiatives.

Looking ahead

Looking further afield, investors from both the US and China will continue their push into Southeast Asia. Indonesia and Singapore, for example, are compelling because of the need for infrastructure development, fewer restrictions on foreign investment in the agriculture, banking and healthcare sectors, and a push for value-added manufacturing and services. Similarly, Vietnam is gaining PE traction in emerging sectors such as fintech, renewable energy, and e-commerce. 

Summary

While heightened trade tensions have led to increased caution in a number of ways, PE activity remains robust, as firms continue to pursue compelling opportunities across a range of sectors and strategies.

About this article

By Andres Saenz

EY Global Private Equity Leader

Trusted advisor to leading private equity professionals and their portfolio companies. Ardent student of consumer behavior. Marathoner. Family man.