China PE continues downward trend

China is experiencing a continuous downward trend for the past four quarters across fundraising, investments and exits, despite a slight upsurge in the beginning of 2012, according to a recent study from Zero2IPO.

The depression in China’s private equity market continued into the first quarter of 2013 across fundraising, exits and investments, according to a recent study from Zero2IPO. In all, private equity in China has remained on a general downward slope for four consecutive quarters, and Q1 2013 had the lowest statistics for private equity in almost three years.

This comes in sharp contrast to studies released in December and January by PricewaterhouseCoopers and Goldman Sachs, which predicted that 2013 could be a “record year” for some aspects of Chinese private equity and Chinese IPOs.

Fundraising for China in Q1 2013 totaled only $2.7 billion across 30 funds, a 60 percent drop year-on-year from $6.7 billion raised across 95 funds, and the lowest fundraising for a quarter since Q4 2010, which had only $2.1 billion raised across 15 funds.

Fundraising by quarter reached its most recent peak for China in Q2 2012, with $7.4 billion raised across 102 funds, according to the study, and has been steadily trending downward since.

Investments showed a similar trend, but less pronounced. Q1 2013 only had $1.5 billion invested across 61 deals, a 68 percent drop year-on-year and the lowest quarter total since 2009. Excluding the Alibaba deal in Q3 2012, private equity investments have been declining steadily since Q4 2011.

Exits, however, showed a much more sudden drop because of the IPO freeze. The quarter showed a total of 13 exits (eight of which were trade sales), which represents a 55 percent drop year-on-year. 2012 also had slight decreases quarter by quarter in exits, but Q1 2013 was the sharpest drop yet.

However, Ernst & Young head of China private equity Robert Partridge said that he is not at all surprised by the low numbers this quarter, and the data suggests to him that 2013 is unlikely to be a “record year” for private equity in China.

“A few months ago, I was much more bullish on the market than I am now,” he told Private Equity International. “The market has been more sluggish than optimists like me had hoped.”

The problems in one sector of the market keep feeding off each other, Partridge explained. As long as exits and IPOs are limited, fundraising will remain difficult. And unfortunately, even with the IPO markets tanked, the valuations of private companies has not changed much, which will probably kill many of the deals E&Y has been working on this year, he added.

Partridge also said, however, that in a recent survey E&Y did, Chinese investors were showing much more optimism for smaller deals below $50 million. To them, it is just a question of whether the market begins to make a comeback in Q3 or Q4.