How covid-19 affected Chinese PE activity in Q1

Early stage VC investments propped up Chinese dealmaking statistics in the first quarter, according to Hao Zhou, head of Bain & Co's Greater China PE practice.

As large areas of China emerge from coronavirus lockdown, data reveal the impact it had on the country’s private equity market during the first quarter.

Deal value fell to $5 billion from $12 billion in the same period last year, according to Bain & Co’s Greater China Private Equity Report 2020. However, there were just 7 percent fewer deals by number over the same period, with more than 100 transactions closing.

See all Private Equity International’s coverage of covid-19 and its impact.

“You still had a backlog of a lot of the deals in the negotiation phase being finalised in January while people hadn’t fully appreciated the impact of covid-19 globally and also in China,” Hao Zhou, head of Bain & Co’s Greater China private equity practice and co-author of the report, told Private Equity International.

“The real impact happened in February when everything shut down, everyone was in panic; we were involved in a couple of deals under negotiation and all of these had to be postponed, if not cancelled. And then, starting from March you really saw an active deal market, especially for smaller-sized deals.”

The bulk of these transactions were in early stage venture capital, which tends to be more flexible than traditional private equity strategies, Zhou said. Sequoia Capital China, for example, completed investments in 25 enterprises in January and February, per China Daily.

Nevertheless, Series A+ deal count in China fell to 39 percent of December 2019 levels in January and to only 26 percent in February, according to Startup Genome calculations from Pitchbook.

Zhou said private equity activity is expected to resume in H2 at the earliest.

China-headquartered firms raised $1.3 billion across three funds closed in the first quarter of 2020, compared with just $70 million in the same period last year and $470 million in Q1 2018, according to PEI data. Last quarter’s figures included Beijing’s CMC Capital Partners III, which closed on $950 million in February with commitments from San Francisco Employees’ Retirement System, Fubon Life Insurance and Cathay Life Insurance.

The data could flatter to deceive. Global private equity fundraising in the first quarter of 2020 was the second highest quarterly total since 2015 and 30 percent larger on a year-on-year basis, PEI data show. The pandemic’s impact on fundraising could become pronounced in the coming months: one in five investors is planning to make fewer private equity commitments in 2020.

“I’ve got investors who’ve told me point blank they won’t make any new commitments for the remainder of the year,” one Hong Kong-based placement agent that raises capital for China funds told PEI on condition of anonymity. “It’s not a walk in the park to access liquidity right now.”