Private equity firms bullish on China’s internet-related companies

PUBLISHED : Thursday, 13 April, 2017, 2:33pm
UPDATED : Thursday, 13 April, 2017, 10:21pm

Private equity investment in China fell in 2016 from a year earlier, although investments in technologies related to the internet continued to see growth, according to global consultancy Bain & Co.

As a sector, the internet accounted for about half of the investment by private equity groups in mainland China, Hong Kong and Taiwan last year, Bain said in a report released on Thursday.

Investments tied to internet-related deals totalled US$24.5 billion, an increase of 14 per cent from 2015 levels, based on calculations from data provided in the report. The number of deals totaled 209, compared to 268 in the prior year.

In the same period, total investment by private equity firms in China totalled US$49 billion, a drop of 29 cent year. In spite of the downtrend, the figure still ranked as the second best year on record, Bain said.

Internet deals include those involving e-commerce, online to offline, fintech, online education, online media and entertainment, and online health-care.

“There won’t be a precipitous plunge for investment in internet, but investments are expected to correct in both value and volume,” said Han Weiwen, Bain’s managing director for Greater China.

Bain said competition among investors has helped to inflate asset valuations, with metrics suggesting record high valuations were reached in 2016.

“Post-investment value creation is more important than ever given the high entry multiples,” said Michael Thorneman, senior partner in China at Bain.

The lofty valuation is particularly apparent in the internet sector, where deal multiples rose to 48 times, well above the average deal multiples of 30 times in China.

Looking ahead, the market environment in China is likely to remain challenging in 2017 due to slowing economic growth, corporate debt and steep valuations, Bain said.

The private equity market in China is the largest in Asia-Pacific, comprising almost 50 per cent of the total deals in the region in terms of five-year cumulated deal value by 2016.