Private equity (PE) activities have increased substantially in the Chinese market over the past decade. PE funds invested in China rose to USD 15 billion in 2012, from below USD 1 billion in 2000. China now represents approximately 10% of global investment.
The reason for this rise is that the Chinese government sees private equity as a key tool for injecting fresh capital into SMEs, thus giving funds an important economic role. The businesses supported by PE investors generate 60% of China's GDP, employ 80% of the Chinese workforce, and account for 70% of exports. These are the findings of a study by Roland Berger Strategy Consultants, "What does the future hold for private equity in China?", published as part of the think: act CONTENT series.
However, the latest government regulations have clouded prospects for investors in the Chinese market: uncertainty about the supervisory authority responsible and about national politics is discouraging international investors. There have also been restrictions put on new IPOs since last autumn, and some 900 companies are waiting for permission to go public. Between 2000 and 2010, IPOs were the most important selling option for private equity investors.
Consolidation in the private equity market
Because of this new situation, experts at Roland Berger expect to see significant consolidation in the Chinese PE market: "The Chinese government is currently tightening up supervision in this regulatory phase to limit risk and boost the positive effects," explains Charles-Edouard Bouée, member of the Executive Committee and President of Roland Berger Strategy Consultants Asia. China has created a flexible regulatory model that strengthens discipline and professional standards in the industry. This will give provincial governments the freedom to tap the economic potential of private equity activities.
However, this market development phase creates new challenges: The market is consolidating and competitive pressure on funds is increasing. Many local private equity funds are now crowding into the market. This trend has positive side-effects too: "This trend creates new opportunities for market players," Roland Berger Partner Wu Qi says. "But to operate successfully in the market, PE companies have to scrutinize these opportunities and bear in mind the specifics of the Chinese market."
PE companies that have focused their business model on IPOs of their portfolio companies should therefore pick investment targets carefully. They should also analyze in detail the long-term prospects for the industry as a whole.
