Johnny come lately

Is it too late for foreign firms to enter the Chinese private equity market? Jenny Blinch explores.

At last week’s Emerging Markets Private Equity Forum, co-hosted by PEI and EMPEA, Bob Stefanowski, chairman and managing partner at 3i Group, told the audience the firm was currently considering expansion into Brazil.

3i is currently conducting a macroeconomic analysis of Brazil, assessing how it can apply its core competencies in the market and whether the right local team can be recruited.

However the single “biggest question” in all this analysis was, Stefanowski noted, whether it was already “too late”.

This exact same question is one that a Beijing-based consultant said he had heard from three separate European-headquartered, mid-market private equity firms in the past two weeks. None of these firms has any prior track record in China.

Jenny Blinch

It’s an interesting question. Any kind of first-mover advantage is of course long gone in both markets, but is it now too late for a foreign GP to gain a foothold full-stop?

It will be up to 3i to answer that question in the case of Brazil, but every trend currently being seen in the Chinese market would suggest the answer is yes.

The rise in prominence of RMB funds, even among the Western firms already present in the country; the migration of experienced private equity managers away from Western-headquartered firms to independent and local firms; the overall boom being seen in the homegrown private equity industry; all these factors say China has gained enough momentum to continue to grow organically and does not have room for new and inexperienced arrivals.

However, it could be that late arrivals have no choice but to try. After all, can any firm with global ambitions, whether for itself or its portfolio companies, really ignore a market like China? Likely not. As one LP recently said: “If you stayed away from China in its entirety, you couldn’t be in the private equity business nowadays.”

The same increasingly goes for markets like Brazil and India. A study released at the beginning of this month by The Boston Consulting Group (BCG) and The IESE Business School of the University of Navarra in Spain suggested the “focus” of the private equity world was shifting to emerging markets and predicted they could soon account for the majority of deals seen globally. In fact, the study noted, in 2009 emerging markets already accounted for 30 percent of deals globally, compared to 34 percent each in the US and Europe. While this figure should be taken in the context of a huge slowdown in European and North American private equity markets, it’s indicative of significant progress. In 1998 the figure was just 5 percent.

Hailing the findings as the signal of a “new age” for private equity, Heino Meerkatt, a senior partner and managing director at BCG, said this shift in focus meant the likely emergence of new major private equity players on the global stage.

But for existing would-be major players that have sat slightly behind the curve, it presents a challenge. Rather than asking whether it’s too late, perhaps “How can we ensure it’s not too late?” is a better question.