Popularity of investing in China making it harder for PE funds to gain returns

The popularity of China for private equity funds is pushing up the cost of the most attractive companies, making it more difficult for funds to achieve returns that satisfy their investors.

The lengthy IPO process on the mainland is also making exiting from an investment more challenging, industry observers say.

“It is starting to become difficult to deploy capital in China, as more capital chases fewer deals. This is driving up valuations,” said James Donnan, the Hong Kong based head of fund services at Intertrust, a firm which provides services to funds.

“The most popular, and hence most competitive, sectors are telecoms, health care and e-commerce,” he said.

Eighty three per cent of Asian private equity professionals believe that China will experience the fastest growth in deal activity in Asia in the next one to two years, according to a survey by Intertrust.

The growth is driven by both domestic Chinese and international funds. Donnan said that a number international private equity investors are now setting up yuan denominated onshore Chinese funds so as to avoid potential delays linked to foreign currency conversions.

The popularity of investing in China is having an effect on prices, with 63 per cent of Asian private equity professionals who responded to the survey saying that the build up of “dry powder” was one of the biggest challenges facing the industry, and 68 per cent saying one of the biggest challenges was successfully exiting from portfolio companies.