We are approaching Chinese New Year. As we usher in the year of the pig – appropriately considered to be a symbol of wealth – what do we predict for one of the world’s most exciting private equity markets?

Fundraising will soften

In 2018 China-focused funds raised $22.8 billion, almost half of the $56.6 billion gathered for the whole of Asia, according to PEI data. Fundraising totals this year, however, may not be as substantial.

China’s slowing economy – GDP growth is expected to be just 6.2 percent this year compared with 6.5 percent in 2018 – and the simmering US-China trade war are putting off investors. In particular North American LPs, which have played a significant role in the growth of the region’s private equity industry.

As Willa Hong, director at Allianz Capital Partners noted this week, the days of China-focused funds tripling in size are probably gone for now. China’s loss may well be India and Japan’s gain, when it comes to fundraising.

Buyouts will come into their own

For those with capital, economic headwinds could present more interesting investment opportunities. Andy Wang, Beijing-based partner at Adams Street Partners, says buyout firms are well placed to capitalise on China’s lower growth rates, more complex operational challenges, generational succession and the strategic rationalisation of multinational companies in the country. “We have seen private deal valuation becoming more reasonable, after a material public market correction and reduced capital supply for PE fundraising,” Wang tells PEI.

Intra-regional trade will rise

China-based managers will look to Asia for their outbound deals as US and European deals come under greater regulatory scrutiny. Under rules introduced in 2018, for example, Germany can block any deal that endangers “public order or security”, while the US has its Foreign Investment Risk Review Modernization Act, which controls investments in critical technology.

In light of restricted access to assets in US and Europe, Chinese GPs are turning to their neighbours in Asia and buying companies in Japan, Korea and South-East Asia. Interest in the latter dovetails with two recent developments in the region: capital market reforms and rising urbanisation.

Write to the author: carmela.m@peimedia.com