Asia’s low volume of exits has plagued private equity firms in the region, particularly in China and India, with firms struggling to raise money without solid track records.
This could be set to change, however, and private equity firms in China should shift their focus to exits going forward as valuations rise and cash-rich buyers look to buy assets, CITIC Capital Partners senior managing director Eric Xin told Private Equity International.
“I’m very optimistic on the economy, I think by 2017 the economy will be doing better and the Chinese market will stay on an upward trend, but that in itself is a problem for private equity – particularly for buyout guys – because they will see the valuations going up,” Xin explains.
As a result, he believes “2015 will be a good market to sell. There are a lot of Asia-listed companies that are interested in buying and the valuations are [high], so there is lots of capital in the market and there are a lot of buyers.”
Moreover, the opening up of China’s IPO market will solve the issue of firms being unable to sell minority positions, helping with the backlog of unrealised exits.
The focus will be a shift from investing for GPs, as lower pricing and steady dealflow has providing firms with a good environment for doing deals.
“This year has been a good year for closed transactions, over the last 18 months we closed six transactions from our China fund alone,” Xin revealed.
“There have been a few contributing factors to this. Overall, 2013 was a low point in terms of valuations [and] statistics show that valuations in the China market were then 3.5x EBITDA multiple cheaper than they were in 2010.”
Moreover, the government has been deregulating a number of sectors in China, opening up a slew of industries to invest in such as education, services and agriculture.
“Asia will have a bull market [in] the long-term, what the [Chinese] government has been doing is deregulating in all sectors. In the next 18 months we will start seeing the results of deregulation. It has been in hundreds of [sectors], for example in healthcare, they have opened up [investment in] private hospitals and now you can easily set up private hospitals.”
Despite a good environment recently, going forward firms should be cautious when deploying capital in new deals because valuations will continue to rise and it is a lot harder to find good value now, Xin adds.
“Next year, prices will go up and there will be more pressure on pricing in terms of investing.”
Moreover, as the market improves, particularly with the resurgence in the IPO markets, it is likely the next wave of RMB private equity firms, which favour PIPE-deals, will begin to emerge, providing even more competition for the industry.
“It will take another year or two for another wave of RMB funds to come out, but once the capital markets come back, it is easy to [invest], there will be easy money to be made and a lot of RMB funds will start popping up.”