China’s US$59 billion internet and technology bubble will trap many private-equity investors when it bursts, Bain & Co says
- Investors are stuck with overhang of portfolio companies bought at high valuations amid worsening outlook
- Median return fell to less than two times in 2016-18 from 4.7 times in 2014-15
China’s internet and technology sector is a bubble waiting to burst, according to an annual Asia-Pacific private equity report for 2019 released by Boston-based global management consultancy Bain & Company on Friday.
According to the report, many private equity (PE) investors are stuck with portfolio companies bought over the past five years at high multiples. They now also face a deteriorating outlook for their investment.
“That scenario, if and when it comes, will make it tough for general partners who have already invested heavily in [the sector] to exit successfully. And the environment for exit is not likely to improve any time soon, given the backlog of companies sitting in the portfolios that were bought at peak prices,” said Kiki Yang, a partner and Asia-Pacific head of private equity at Bain.
China claimed more than 70 per cent of the total internet and technology PE deal value in Asia-Pacific in 2018, during which PE investors put US$59 billion – 20 times the level in 2010 – into its internet and technology companies.
Such companies have drawn mounting speculative investment, much of which was invested through median merger and acquisition deals at the rate of 31 times Ebitda (earnings before interest, taxes, depreciation and amortisation).
This is 2.4 times higher than the median rate for Asia-Pacific deals in 2016-18; and twice as high as for other sectors in China, the report said. About two-thirds of Chinese private equity investors surveyed by Bain also said they saw a “high to very high” risk of this bubble bursting in the coming years.