European LPs look to China

Many European limited partners are concerned about China's regulatory environment and cultural differences, but most want to invest increasingly in the country.

European limited partners are keen to increase their exposure to the Chinese private equity market both through western GPs and through domestic Chinese funds, a study has revealed.

According to a survey conducted by Epiven, a European private equity advisory firm specialising in China, 85 percent of European LPs would prefer to invest in domestic Chinese funds if provided with the opportunity, and 82 percent of them would prefer to invest in Asian regional funds. Seventy percent of European LPs are also keen to invest in China through China-dedicated funds managed by western GPs and 62 percent of them said they would invest in funds managed by western GPs that have portfolio companies in China.

Already, most European LPs are experiencing increased exposure to the Chinese private equity market. Part of this trend is best explained by the superior returns that China-focussed private equity funds have been generating. According to Epiven, the mean IRR for private equity in 2007 in China was 67 percent, almost double the returns generated from private equity in Europe, which stood at 36 percent.

Of all the LPs surveyed, 52 percent have some kind of private equity allocation to China, and 88 percent expect their exposure to China to increase.

However, while there is an increased interest among European LPs to increase their exposure to private equity in China, a few concerns remain. Accessibility to fund managers in China remains a problem for investors. Though 63 percent of LPs said they travelled regularly to China, only 15 percent of them have offices there. Furthermore, 62 percent of LPs stated that finding the right GP in China was the biggest barrier to increasing investments in China. 

And while a vast majority of European LPs are keen to step up their exposure to Chinese private equity, more than half of them reported “low knowledge” or “no knowledge” in areas such as recent industry developments, historical returns, access to fund managers, and key people and events. Thirty one percent of those surveyed said they “required additional information” on China.

A large number of LPs surveyed are concerned about regulatory issues, with 90 percent of them citing that unclear regulations in China are a perceived risk, and 42 percent of LPs expressing the same views with regards to differences in language and culture.

However, only 4 percent of respondents stated that they perceived low returns on Chinese private equity investments as a risk.

The prospects of superior returns, coupled with the Chinese authorities' attempts at creating a favourable environment for private equity activity, are indicators which suggest that European LPs will divert more capital to Chinese private equity at least in the coming months.

The respondents in the survey included European institutional investors in private equity with €156 billion ($246 billlion) of European private equity assets under management.