Subject: China: PE rides the global storm
From: <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Jim Bulger" <[email-masked]>, <[email-masked]>
Date: Mon, 10 Oct 2011 17:28:30 +0800

2011年09月29日 06:27 AM <http://www.ftchinese.com/archiver/2011-09-29>
China: PE rides the global storm
By Pan Kwan Yuk

The US economy may be in the doldrums and the eurozone debt crisis is
lurching from bad to worse. But for private equity investors looking for
returns, China remains the flavour of the moment.

Fundraising for China-focused private equity and venture capital has been
unscathed by the global financial market turmoil. Having hit $20.8bn in
2010, fund raising activities are on track for another record year after
having reached $18.6bn so far this year, according to the latest figures
from Asian Private Equity Review.

And while China’s budding private equity scene has long been dominated by
big foreign players – think Carlyle, TPG and Blackstone – homegrown Chinese
groups are catching up fast.

Traditionally accounting for just a sliver of the overall fund-raising
market, domestic renminbi-denominated PE funds have become a significant and
growing force in China, representing a staggering 67 per cent of total funds
raised in 2010, up from 18 per cent in 2007 according to APER.

“The development of locally managed funds in China has become a prominent
trend that cannot be overlooked,” Robert Partridge, Ernst & Young’s head of
transaction advisory services for Greater China, told beyondbrics.

The funds’ rise, congruent with Beijing’s efforts to build up “national
champions” in industries from banking to steelmaking and oil, has been
accelerated by the changing regulatory environment in China.

One advantage that RMB funds – both domestic- and foreign-managed – have
over their dollar counterparts is that they can raise money from local
investors. And over the past two years, the pool of local capital available
has increased sharply as regulators changed rules to allow institutional
investors – including government institutions, pension funds, insurance
companies – to invest in PE funds.

Meanwhile, the ever growing pool of wealthy Chinese individuals – flushed
with cash and in search of diversification – has created another group of
investors for local PEs to tap into.

“There are clear advantages to RMB funds,” Sam Robinson, head of global
investment at SVG Advisers, told beyondbrics. “RMB are not subject to as
many regulations as dollar funds – such as exchange controls. They can move
more quickly on deals because they are not hampered by the burden of foreign
investment approvals and can invest in regulated industries that foreign PEs
cannot.”

The flipside though according to Robinson is that RMB funds have unclear
legal structures and unclear liquidity and exit strategies.

So what does the rise of homegrown Chinese funds mean for foreign players?
Will this reduce investment opportunities and returns for them?

“The challenge for the global firms is that they will be competing against
the ‘favoured son’,” said Partridge from E&Y. “A company in China looking to
raise money may see a RMB investor as having less closing hurdles, as well
as ease in exiting.”

Foreign PEs, for their part, have no plans to sit idly from the sidelines.
Wall Street names that have launched RMB funds so far this year include:

- Blackstone, which raised RMB 5bn in April

- Carlyle, which completed in July a second close of its RMB 5bn fund at
RMB3.2bn

- Morgan Stanley, which announced in May plans to raise RMB 1.5bn with
Hangzhou Industrial and Commercial Trust. The new fund will focus on
investment opportunities in the province of Zhejiang

- Goldman Sachs, which is seeking to raise RMB 5bn for a vehicle that it is
forming in partnership with Beijing city government

In all, there are 89 foreign PE firms and 394 local PE firms operating in
China at the moment, according to APER.

The attractions of China for foreign private equity firms are obvious. With
the boom in leveraged buy-outs in Europe and the US over following the 2008
Lehman crisis, many see opportunities for deal making in China – where the
(relatively) robust stock market has produced many a profitable exit.

“The principal exit for PEs continues to be IPOs,” Ian Coleman of PwC told
beyondbrics. “There is little secondary buy-outs. Also because of Chinese
banking rules on gearing, PEs in China can’t leverage to the hill to make
money from financial restructuring. So they end up functioning more like
venture capital – the majority of deals are non-control minority stake,
pre-IPO type.”

In this context, foreign funds – whose investor base tends to be skewed
towards institutions rather than high net worth individuals – does offer an
advantage over homegrown ones, said Robinson from SVG.

“Dollar funds will always have a place because when you are trying to grow a
busines, you want long term investors,” he said. “Money from wealthy
individuals can go in a year or two but institutions will take a longer term
view.”

Still, given the rapid influx of capital and increasing competition for
deals and rising valuations in some sectors, questions are being asked about
whether the Chinese PE market has not reached its peak.

Ernst & Young – like others PE players beyondbrics has spoken to – remains
upbeat about the sector’s prospects. As it writes in its latest report on
private equity in China:

“The recent sell-offs in the public equities markets afforded nimble firms
an opportunity to capitalise on depressed valuations and enabled significant
take-private transactions. These same dynamics, however, limited exit
opportunities for many firms, especially those seeking an IPO.”

“The rapid rise in activity has many observers asking if China’s market has
reached unsustainable levels. Indeed the rapid influx of capital has led to
increasing competition for deals and rising valuations in some sectors.”

“Despite these near-term challenges, however the investment thesis remains
intact. China is still in the very early stages of transitioning from its
manufacturing origins to a consumer-driven model and with PE penetration
just a fraction of that in developing markets, the opportunity to
participate in the country’s growth trajectory is compelling.”

There’s no doubt that there is a lot of buzz going around private equity
investments in China. Whether the returns will continue to live up to the
hype remains to be seen.

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