Around 90 percent of GPs in China expect deal activity to increase significantly or slightly over the coming months, having seen a decrease in dealflow during 2013, according to a recent global private equity report by accounting firm Ernst & Young.
Private equity firms in China closed 16 transactions worth $10.8 billion in 2013, an 18 percent decline from the $13.1 billion invested in the country in 2012, the EY report showed, using data from Thomson One and Dealogic.
“2014 looks set to be a better year for China’s economy and its private equity industry. The government’s 12th five-year plan, announced in late 2013, offers some clarity around future policy as the economy transitions from export-driven to one characterised by consumption,” the report said.
“This shift will take some time to play out. China’s growing middle class should create high demand for consumer goods, which in turn should drive private equity investment opportunities as companies seek capital and expertise to help them meet this demand.”
The expectation is in contrast to Indian GP sentiment: only 47 percent expect an uptick in dealflow over the coming months.
Last year, there were 66 buyouts in India, worth $2.3 billion, down from the 86 investments made in 2012 totaling $3.8 billion, and significantly lower than 2011 figures when $5.2 billion was invested across 94 deals.
However, announced deals by private equity firms globally increased 25 percent last year, jumping to $249 billion from $200 billion in 2012.
In particular, respondents noted an marked increase in interest in private equity investment in the US and Canada during 2014, with 74 percent saying dealflow will likely rise and 20 percent saying there would be no change.
By comparison, just 31 percent said there would be more interest in Western European private equity deals, with 46 percent expecting less interest.
“Looking ahead, the effects of the geographic rebalancing seems set to persist. European and US private equity investment markets are climbing, with Europe in particular showing a strong start to the year. At the beginning of 2014, there were 12 megadeals valued at €14 billion in the European pipeline. Increasing confidence in the US economy is also starting to attract more private equity investment,” the report said.
However, increasing competition across the globe – particularly from pension funds doing direct transactions – and improving stock markets have pushed up valuations.
“While this offers good exit opportunities, on the buyside, private equity will need to be circumspect about making new acquisitions. Average global purchase price multiples crept above 8x globally in 2013 and, with the prospect of developed markets’ stimulus policies changing in the near to medium term, private equity globally looks set to maintain a cautious stance and invest highly selectively,” the report said.