Mainland a magnet for private equities
China drew a record US$16 billion (HK$124 billion) of investment from private equities last year, with retail, industrial goods and hi-tech the most sought-after sectors for investors, says a new report.
The report, jointly released by Bain & Company and the European Union Chamber of Commerce yesterday, said the country had become a top destination for private equity investors amid the ongoing global economic turbulence.
Private equity investment in China, which slumped in 2009 following the financial crisis, rebounded more than 60 per cent year on year to US$13.9 billion in 2010, and grew 15 per cent to US$16.1 billion last year. The figures do not include deals valued less than US$10 million. 'We expect PE capital growth to be stable and healthy in China this year,' said Han Weiwen, partner at Bain & Company.
Last year, funds raised by domestic private equities exceeded that by foreign investments for the first time, accounting for around 60 per cent of the total in China.
Han said there had been a change in the mix of private equity investment in recent years as investors increasingly shift funds from financial services to retail, hi-tech, industrial goods and health care.
The report gleaned information from 131 companies that received private equity investment between 2004 and 2008. It shows that 65 per cent of private equity capital went to companies in inland provinces such as Qinghai, Xinjiang and Sichuan instead of more developed coastal regions.
Private equity investors are also showing a stronger interest in smaller cities, with the deal value in third-tier mainland cities more than doubling to US$2.8 billion in 2010 from 2009.
Despite the fast growth, deal sizes in China are often small. The average size of private equity deals between 2008 and 2010 is valued at only US$50 million, around a third of that in Japan and South Korea.
The most common practice for private equities in China is to select an investment target, build value quickly and exit through an initial public offering for the company.
'The trend [in China] is that private equities tend to hold their portfolio companies longer than before thanks to a more difficult IPO market and also because of the recognition that working with the portfolio companies is essential to building [their] value,' said Han. The average holding time for private equities in China was around 2.1 years between 2007 and 2008.
The study also found that private equity firms played an important role as management and financial advisers to their portfolio companies, helping them strengthen corporate governance, improve brand image and support their expansion.
2.2m
The population of Xining, capital of Qinghai, one of the inland provinces that have attracted private equity investment
