Private equity transactions in China 2000-2010

Source: Thomson Reuters

PE remains uniquely qualified to play an important role in the next stages of China’s development.

Investors continue to target China’s growth story as LPs commit additional US$8.3b to new vehicles

China continues to attract significant attention from global investors intent on participating in China’s growth story. Despite significant macroeconomic headwinds and a recent deceleration in the nation’s growth rate China is expected to grow at 7.5% this year, down from 9.2% in 2011, according to the IMF the region remains one of the most attractive venues for PE investment.

As a result, fundraising for vehicles targeting the region increased significantly in the first quarter of 2012, US$8.3b in new commitments, well over double the amount raised in the final quarter of 2011.

Moreover, the outlook for new fundraising remains positive a recent survey by the Emerging Markets Private Equity Association (EMPEA) found that China remains one of the top three regions for deal making. Additionally, expectations for funds targeting China are high the EMPEA survey also found that investors expect China funds to generate the highest net returns over the next three to five years.

However, while the fundraising outlook remains robust, recent regulatory developments could have a significant impact on the types of funds raised. While the focus for many foreign firms over the last two years has been on renminbi funds, recent pronouncements from one of the industry’s chief regulators could shift the focus back to USD. As a result, the industry will be keeping a close eye on additional developments.

While fundraising activity increased substantially in Q1 versus Q4, deal activity across the region dipped in the first quarter. PE firms announced 86 new acquisitions with an aggregate value of just US$1.9b, a decline of 72% from the 143 deals valued at US$6.8b announced in Q4.

Despite the decline however, activity could quickly rebound. Already in the early weeks of the second quarter, several substantial deals have been announced, including CVC Capital Partners’ US$644m investment in Hong Kong Broadband Network.

PE-backed IPOs in China, Q1 2011–Q1 2012

Source: Dealogic

As 2012 progresses, China will continue to operate amidst a global environment of continued instability and volatility. However, the country’s unique mix of increasing domestic demand, favorable demographics, and its critical role as a global exporter should continue to provide a wide array of interesting opportunities for prudent investors with strong value propositions and solid investment theses.

With low PE penetration rates, high growth across most of the nation’s industries, and strong demand for capital and operational expertise, PE remains uniquely qualified to play an important role in the next stages of China’s development.