Once considered strictly a growth capital market, private equity in China has reached a new stage of maturity. With it has come an influx of new managers.

Homegrown stalwarts, such as CDH Investments, CITIC Capital and FountainVest Partners, are about to be joined by other names. Nexus Point Partners, Centurium Capital, Dehong Capital Partners and Rivendell Partners are all raising debut funds. Their founders boast good track records at firms well known to global investors: MBK Partners, Warburg Pincus, KKR and Carlyle.

Meanwhile, C-Bridge Capital Partners – established in 2014 by former Temasek executive Wei Fu – is racing towards a $650 million final close on its third fund. Its LPs include family foundations and other institutional investors from the US, Asia, Middle East and Europe.

A combination of forces is shifting China PE from a growth to a buyout play, including the country’s slowing economy, declining interest in traditional industries, succession planning among first-generation entrepreneurs and new capital. “Any of these GPs are good candidates for institutional investments from an investor point of view based on the founders’ past track record,” says a Hong Kong-based fund of funds manager.

There was more than $100 billion in dry powder for Greater China by the end of 2017, according to Bain & Company. Although PEI data show fundraising slowed in the first half of this year to $3.6 billion, compared with $6.9 billion in the same period of 2017, more funds with larger targets are expected to hold final closes by year-end, adding to the mountain of available cash.

But the market can take it. The first wave of buyout shops – which previously dominated the mid-market in China – have moved up the deal-size spectrum leaving a vacuum waiting to be filled. “The market has opened up for newer, smaller general partners that are experienced and have proven that they have dealflow execution,” says an Asia-based placement agent.  It is a similar story for global and regional GPs with China-focused funds which have grown their fund size and are looking to write larger cheques.

But among the excitement, there are those that sound a cautionary note. As PEI has noted before, private equity in China is rapidly evolving. What started as a pre-IPO story in the early 2000s and shifted into a growth capital play before the crisis then became a wave of privatisations and is now morphing into a mid-market buyout play.

Most of the dealmakers behind these hotly anticipated new firms made their names as part of the growth capital trend. Buyouts may represent a step into the unknown.

“The China market is different now and the way to make money is also different,” notes a Hong Kong-based LP. As macro conditions become less benign and competition pushes up asset prices, these new firms will face a different set of challenges.

carmela.m@peimedia.com