GPs need to instill the best corporate governance polices and processes in their Chinese portfolio companies to make good exits, says a study from the German Stock Exchange and law firm CMS Hasche Sigle.
It argues that GPs are no longer able to make good returns just by riding China’s growing economy.
“The times where companies could be sold with high multiples due to the China growth fantasy are definitely over,” said Alexander von Preysing, deputy head of issuer & primary market relations at the German Stock Exchange.
The study was based on interviews with European and Chinese private equity fund managers that invest in Chinese private enterprises, as well as institutional investors based in China and Europe.
Preysing added that corporate governance is especially important in attracting buyers due to the initial public offering (IPO) route in China remaining closed.
The study also revealed that while GPs would welcome a more rigorous approach to the implementation of international corporate governance standards, Chinese entrepreneurs are yet to be won over by western corporate governance practices.
“There is still a long way [to go], but the entrepreneurs in China will sooner or later come to the realization that [there is] no way around it,” said Volker Potthoff of CMS Hasche Sigle.