Investment activity in China's private equity market is expected to increase, and private equity investors remain confident about its long-term prospects, according to a recent Deloitte survey. Conducted last month and covering 30 leading private equity investors, the survey found that they were expecting private equity to continue to appeal to investors amid a weak initial public offering market and tight debt finance. 'Retail and consumption growth in China remain a very exciting opportunity, because no other sizeable market in the world is growing at that rate,' said Ken Dewoskin, director, Deloitte China Research and Insight Center. 'There are also fairly high levels of capital misallocation on the mainland. Significant capital shortfalls, particularly in the property market, set the stage for an attractive set of potential offerings for private equity.' Valuations were expected to be lower over the next 12 months, reflecting lower public equity markets and providing both an opportunity for new investment and a problem for investors looking to exit. 'At one level we are seeing a continued strong funds flow into China and Asia, where above-market rates of return can be achieved,' said Chris Cooper, head of private equity at Deloitte China. 'But in tandem with this is the depression of listing prices, which is causing private equity buyers and business owners or sellers stress around valuations. We are seeing some slowing of deal activity or deal closing, though certainly not a reduction of deal opportunities.' Survey respondents also had varied reactions to the impact of the credit crunch on the industry in China. Some investors believed the tightening would hurt the debt market, while others believed opportunities would open up elsewhere. Chinese private equity, however, was expected to emerge stronger from the turbulence in global financial markets. While private equity investors in the survey indicated their confidence about the long-term growth of the industry in China, that same optimism also means that competition will increase further, with more new domestic and foreign players entering the market. Global strategic buyers, such as multinational corporations, are increasingly seen leading deals with private equity co-investors, and domestic competitors in the finance business are also springing up. 'In some second-tier Chinese cities we're seeing the rapid formation of 20 or more small boutique private equity players. It's easy from the outside to underestimate how much of this activity is going on inside China,' Mr Dewoskin said. In terms of future challenges, respondents in the report flagged two potential adverse impacts to the confidence in private equity interests: first, the value of the renminbi against the US dollar. Since July 2008, the appreciation of the renminbi against the US dollar had stopped. From the standpoint of private equity firms that are collecting investor money in US dollars and looking for assets that are renminbi-based, this is a factor to keep in mind as it can affect asset values. The softening of the property market is the second challenge, according to Mr Dewoskin. He said that the latest Shanghai property auction in mid-September was probably the least successful land auction that Shanghai had organised since its property boom began 10 years ago. 'We're beginning to see some serious softening of prices in first and second-tier cities. A steady erosion of stability and value in the property market could also dampen some enthusiasm for private equity investments,' he said.
