Mainland fund boom runs out of road
Many of country’s 3,500 private equity funds could be wiped out in squeeze on domestic market and growing economic uncertainty, say observers
Remisier kings
The cousins who have taken over Peter Lim’s throne View PDF
Comments
Many of country’s 3,500 private equity funds could be wiped out in squeeze on domestic market and growing economic uncertainty, say observers
Reuters in Shanghai
17 December 2011
The mainland’s private equity boom, sparked by the prospect of quick and easy money and returns as high as 400 times on a cash investment, triggered a wave of fund launches, creating as many of them in the nation as in the rest of the world put together.
That boom appears to have now come to an abrupt end, however, as domestic market weakness, tight monetary policy and growing economic uncertainty are making both fundraisings and exits for private equity firms increasingly difficult.
As a result, many speculative funds which invest in companies just before an initial public offering only to sell out soon after their listings could be wiped out.
Gao Jianbin, a Shanghai-based partner of PricewaterhouseCoopers, said (PWC): “China has about 3,500 private equity funds and that’s an awful lot. At the end of the day, only those with management expertise and the ability to grow invested companies can survive,” Gao said, and many funds would be forced to focus on venture capital and mergers and acquisitions businesses.
Before the 2008 financial crisis, industry experts estimated the total size of the entire global industry to be around 3,000 to 4,000 funds. But the definition of a private equity fund on the mainland can be quite different compared to the rest of the world.
Private equity deals normally involve a firm putting a small amount of cash down for a takeover, and borrowing the rest. After streamlining the company, the firm sells it at a premium and pockets the money, keeping part of the profit and handing the rest back to institutional investors.
On the mainland, ownership restrictions are widespread and leverage finance markets are still in their infancy, so the vast majority of deals are done in cash and for a minority stake.
In that sense, it is often hard to tell the difference between a private equity, venture capital, and hedge fund deal. Mainland funds generally lack the kind of institutional backing that their Western peers have.
The mainland’s private equity boom started immediately after the 2008 global financial crisis, spurred by a flurry of IPOs following the launch of the Nasdaq-style ChiNext board on the Shenzhen exchange, as well as the US$586 billion economic stimulus package Beijing put in place to ward off financial contagion.
According to the fund consultancy ChinaVenture, 1,084 yuan-denominated private equity and venture capital funds, including those of the global buyout giants Carlyle Group, Blackstone Group and TPG Capital, were launched on the mainland over the past three years, raising a combined US$68.7 billion.
For comparison, 925 funds were launched in the United States over the same period, raising US$236 billion, according to Thomson Reuters data.
Unlike in mature markets, most Chinese fund managers, including venture capitalists, have up to now only focused on pre-IPO deals, betting on listings that would typically boost the value of their investments. Currently, 90 per cent of exits were made through IPOs.
In a glaring example of how lucrative such pre-IPO deals were, New Horizon Capital made a stellar unrealised investment return of 400 times from its investment in Sinovel Wind Group after the wind power company went public in January, according to the fund consultancy Zero2IPO Group.
However, the prospect of a quick and profitable exit through IPOs has been dimmed by a domestic stock market that has tumbled nearly 20 per cent in the second half of 2011 and now rests near 2-1/2-year lows.