The Carlyle Group made seven new China investments representing more than $700 million during the period January 2012 to January 2013, according to data from the firm provided to Private Equity International.
The activity is in sharp contrast to the mainland’s plunging dealflow, which had an annual drop of about 40 percent to $10 billion in 2012, according to Mergermarket data.
Two examples of the firm's deals are a 49 percent stake in Mandarin Hotel Holdings and a 13.5 percent stake in Meinian Onehealth Healthcare. Carlyle wouldn’t disclose financial details, but officials said single investments by Carlyle Asia Partners are normally above $75 million.
During the same 13-month period, Carlyle returned about $2 billion back to investors from 19 China investments,
The centerpiece was the completion of a phased exit from Hong Kong-listed China Pacific Insurance, for a return that analysts have estimated to be 6x.
“China remains a very attractive place to invest, create value and produce exits,” Xiang-Dong Yang, managing director and co-head, Carlyle Asia Partners, told PEI.
Yang believes opportunities are emerging in industry consolidation plays, driven by China’s transition to a consumer-led economy.
People have become more realistic and the widely-shared message in China is that private equity is not a quick way to make a lot of money
“We like the transition theme in the economy and see more industry consolidation,” Yang said. “Players that used to be able to grow real fast now have the need to consolidate in order to become much more profitable.”
He also mentioned China’s private equity-backed cross-border M&A, which should continue to increase gradually. Private equity firms with a global footprint will be in the best position to work on these deals, he believes. Carlyle, for example, is helping Yashili International, a China-based infant formula company, make an investment in New Zealand.
“If you look at [cross-border] over a three – five year horizon, it will pick up. It is a trend that will happen, but each case will be very different and it must be a situation where it will make sense.”
Carlyle also likes take-private deals, given the underperforming IPO market for Chinese companies. In 2012, companies on mainland exchanges had a price-to-earnings ratio drop to 10.7 times forward EBITDA from 17 times in mid-2011, according to an Ernst & Young report.
IPO exits have been particularly tough. In fact, the IPO queue for mainland bourses is around 800, PEI reported earlier.
Carlyle’s China divestments did not hinge on IPOs, but included sales to strategic parties such as large state-owned enterprises, Yang said. “[SOEs] are likely to be consolidators, buying reasonably well-run businesses and providing a way for private equity to exit.”
Since the firm first entered China in 1998, it has done over 60 deals in China representing more than $4 billion of capital, according to Carlyle officials.
Yang remains bullish on China’s economic growth. “We have a robust deal pipeline in China in 2013 [and are] seeing great investment opportunities in consumption-related sectors.”
He believes China’s private equity industry is headed in the right direction in the longterm despite some negative developments, which he says are growing pains.
In early 2012, Yang spoke at an industry event and made a point about private equity being a low barrier-to-entry business in China.
He told the apocryphal story about two private equity executives talking in a Beijing taxi when the taxi driver turns around and says, “You're in private equity? I’m also doing some private equity investing”.
The anecdote is less true today, he says. A few years ago, private equity investors in China reaped large returns in a short time period, largely through pre-IPO deals. Since then, the public markets have cooled and there have been media reports about domestic funds that didn’t return money to investors.
“People have become more realistic and the widely-shared message in China is that private equity is not a quick way to make a lot of money” Yang said.