China private equity still an attractive long-term strategy
Findings suggest a significantly better risk-adjusted return for China than rest of region
Against the backdrop of the recent extreme volatility in China’s public equity markets, as well as its currency devaluation and a number of downward GDP revisions, it’s no wonder that investors’ confidence is shaken, with some wondering if it’s time to hang up and exit the market.
On the ground in China, many have formed the view that Chinese private equity returns have been lower and riskier than returns in their developed market counterparts.
Indeed, when comparing the quarterly and annual performance of global private equity with returns from Chinese private equity, the latter has been significantly more volatile over the same period. During the 18 months before the first quarter of 2015, this volatility translated into higher returns relative to the global industry while Chinese private equity underperformed during most of 2012 and early 2013.
Yet when these volatile short-term returns are assessed across the life of a fund, we see a smoothing effect to performance and a sharp reduction in volatility, challenging conventional wisdom and debunking the myth that China may be losing its attractiveness as a top private equity destination.
The size of the economy versus its maturity has also regularly created pockets for arbitrage
These findings were unveiled in the latest Private Equity Navigator – a biannual analysis of the global private equity industry produced by INSEAD in partnership with eFront’s Pevara – where we find that Chinese private equity funds have performed well relative to their global peers for fund vintages from 2005 to 2012. In fact, examining returns for this period, Chinese funds in the study have outperformed, generating a pooled mean internal rate of return (IRR) of 12.5 per cent, compared to 9.9 per cent for the industry globally. Funds of the same vintages investing in North America, Europe and Asia have generated pooled mean IRRs of 9.98 per cent, 10.2 per cent and 8.3 per cent, respectively.
Further, the range of returns between the best- and the worst-performing funds in our sample by region – representing a simple measure of volatility – is the narrowest for China. The country has a high of 28.2 per cent and a low of -2.56 per cent, while Europe has the largest range including the best-performing top quartile at 30 per cent, as well as the worst performing funds at -14.4 per cent.