Chinese private equity on the rise

AVCJ
28 September 2010

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The latest market data points to Chinaтs inexorable rise to become the leading private equity market in Asia Pacific. In the latest of our regular features on Asian private equity, we look at the growing importance of Chinaтs private equity market.

Its significance as a private equity venue has already run ahead of its overall economic growth, as it became the largest investment and fundraising market by value in the region long before it overtook Japan as the world's second largest economy by nominal GDP in Q2 2010.

However, even though the Chinese economy may be on track to surpass the US within 20 years, according to Goldman Sachs and the World Bank, what kind of private equity market is developing there? And will it have anything like the characteristics familiar to those in the West?

The Chinese private equity market has seen a significant rebound since the global financial crisis that started with the collapse of the US sub-prime mortgage market in late 2007. Fundraising so far in 2010 is up 90% to $8.56bn according to research from the Asian Venture Capital Journal (AVCJ), with RMB denominated funds becoming increasingly common.

This is, of course, still far below the €100bn of private equity money raised in the US in 2009, but is nontheless impressive for a country where financial institutions are still developing, and local LP numbers are still growing. Recent changes by the China Insurance Regulatory Commission, allowing domestic insurers to invest up to RMB226bn ($33.2 bn) into private equity, it is not inconceivable that the US's top-spot could be wrestled from it in the not-too-distant future.

Indeed, a number of market experts believe the figures are understating the market. "There is a lot of activity below the radar screen, particularly in the RMB area, which goes unreported," says Johannes Schoeter, Founding Partner of China New Enterprise Investment (CNEI). "I would not be surprised if the total numbers were larger [than those reported]."

Finally, on the exits side, private equity is also delivering returns to investors, particularly through IPOs. While the post-GFC appetite of international trade buyers left trade sale exits subdued in 2010, IPOs with a private equity component produced almost $22bn of value in Q3 2010 alone.

A more detailed look at the rise of Chinese private equity will be published in the upcoming edition of unquote" Private Equity Europe.