China economy

Why last year’s record private equity investment growth in China is set to slow

PUBLISHED : Tuesday, 26 April, 2016, 8:29pm
UPDATED : Monday, 30 May, 2016, 5:11pm

Private equity’s (PE) record high investment growth in China in 2015 is expected to slow down from this year against the backdrop of a weakening economy and growing competition, says an industry report.

PE investment deal value jumped 56 per cent year on year to a record high of US$69 billion (HK$535.2 billion) last year in mainland China, Hong Kong and Taiwan, as multibillion-dollar deals doubled and the internet sector buzzed with activity. But the industry is now worried about a seemingly inevitable slowdown due to a lacklustre macro outlook and fierce competition, Bain & Company said in a report on Tuesday.

“While increased activity means more opportunities for investors, we can also expect more vigorous competition for deals that could start to dry up as economic conditions deteriorate,” said Michael Thorneman, managing partner of Bain Greater China.

The PE sector already flagged worries against a weaker growth both at home and abroad.

China private equity still an attractive long-term strategy

Mainland China’s economy grew 6.9 per cent in 2015, the slowest in 25 years. Beijing aims an economic growth of 6.5 to 7 per cent this year, plans to launch a supply-side reform that includes destocking, and cut capacity.

The International Monetary Fund this month cut its forecast for world growth this year to 3.2 per cent, 0.2 percentage points lower than its January outlook. It forecast the Chinese economy to grow 6.5 per cent this year and 6.2 per cent in 2017.

In Bain’s recent survey of 125 private equity executives in Asia-Pacific, more than 60 per cent cited macroeconomic conditions and over half pointed to increased competition as key challenges.

Deal sourcing and valuations also hampered the investment outlook, the consulting firm said.

Record number of private equity funds liquidated in China

As a result, nearly half of survey respondents expect fundraising to be more challenging in the coming year due to a bumpy initial public offering market, changes in the macro environment and high valuations that could hamper exit activity.

In 2015, China-focused PE fundraising dropped 32 per cent year on year to US$14 billion.

Kiki Yang, a partner at Bain’s Global Private Equity Practice, said the PE sector is facing a new normal amid China’s economic transformation after a surge in 2014 and 2015.

Despite the challenges, Bain said, opportunities remain in the sectors, including internet, wealth and health-driven consumption, and sectors involving Beijing’s “Made in China 2025” initiative, such as robotics, electric vehicles, pharmaceutical and medical devices.