Any optimism investors had about China going into 2012 fizzled away as the year progressed and GDP growth slowed.

Although the predicted 7.8 percent GDP growth for 2012 is still healthy (and enviable), it has been continually lowered by the World Bank and the IMF. The sub-8 percent GDP growth rate raised concerns among GPs and LPs that forecasts for returns on investments made a short while ago may have to be revised downward.

Fundraising data reflected that. PRC fundraising was down more than 50 percent to $10.7 billion as of 1 November compared to all of 2011 ($24.1 billion), according to PE Asia’s data division.

RMB fundraising followed in tandem, dropping 43 percent to RMB 41 billion to November 2012 compared to RMB 72 billion in 2011.

“The main investors in these funds, the high net worth individuals, have all but disappeared from the market because the RMB fund managers have not been able to deliver returns in the short timescales they were expecting,” Jingjing Bai, director in Eaton Partners’ Hong Kong office told PE Asia.

Deal value to 1 November also plunged about 65 percent to $5.6 billion compared to the full year total of $16.4 billion in 2011, according to Mergermarket data.

The loss in confidence that goes with the slowdown may be even more devastating – it’s hard to cover a 20 percent drop in GDP growth, adds Robert Partridge, head of China private equity at Ernst & Young.

Yet China is huge and complex and different cities and sectors are moving at various speeds. The key is to narrow focus. Far-flung cities such as Chengdu are growing in double digits. “Tightly focusing on a specific sector can uncover growth up to 30 percent,” says an industry source. “The size of China’s market allows such isolated focus.”


On a more positive note, the trend of cross-border transactions became increasingly evident this year.

Hony Capital was among the first private equity firms to articulate a cross-border strategy, telling PE Asia it will be the focus of Hony’s latest US dollar-denominated fund, which closed on $2.37 billion in January.

Hony won’t be the only one, says Juan Delgado-Moreira, managing director for Asia and Europe for advisory firm Hamilton Lane. “We’ll see a more international approach…more cross-border deals with Chinese GPs focusing on outside of China investments – like Hony. You’ll see that with Baring, Unitas, CDH. Every new fund, every Chinese fund of some size will have an allocation for going outside of China and beyond Asia.”

Activity ramped up this year, supporting the predictions. Chinese companies – largely state-owned enterprises – have been acquiring foreign companies for scale, diversity and to acquire brand name assets. In 2012, Europe has been a key destination.

Outbound deals almost doubled in value to $8 billion in the first eight months of 2012 from $4.2 billion in all of 2011, according to figures from Thomson Reuters.

Some key deals involving Chinese companies buying into Western brand names include Shandong Heavy Industrial Group’s $915 million investment in private equity-owned Kion Group in Germany; Sany Heavy Industry’s $408 million acquisition of Germany’s Putzmeister in partnership with CITIC Private Equity Funds Management; and Lion Capital’s $1.9 billion exit of UK-based Weetabix to Chinese state-run enterprise, Bright Food.

“As they start to seek out new sources of capital, many Chinese companies think they can grow by going overseas,” Partridge adds.

Chinese companies also hope to build the next Lenovo, the PRC’s global brand name computer company that grew from a 2005 carve-out of IBM’s PC division in a $1.75 billion acquisition.

At home, public markets dried up in 2012. Toward the end of 2012, Greece’s stock market was outperforming China’s.

Private equity-backed IPOs in China have dropped to $8.4 billion in 2012 from $24.3 billion in 2011, according to data from Thomson Reuters.

With the capital markets down, private equity would seem to be a good alternative source of funding for Chinese companies. Depending on who you talk to, entrepreneurs are either willing to work with private equity at reasonable valuations or are unwilling to make deals unless they meet their original valuation hopes – even though slowing growth has lowered valuations across the board.

But slowing GDP also lowers returns.

“Ten percent plus GDP growth in China will never be here again and that’s kind of scary,” said Xiang-Dong Yang, managing director of Carlyle Asia Partners, speaking at an industry event earlier this year. “If GDP grows 7-8 percent, how do you to get that magic 25-30 percent return without leverage? That is the reality we’ll be facing.” ?


China’s regulators moved carefully this year to clarify private equity regulations and to continue a gradual opening of the PRC’s financial industry to foreign investment.

China’s National Development and Reform Commission in late April ruled that all RMB funds sponsored by foreign GPs should be subject to restrictions in the MOFCOM catalogue, which lists sectors in four categories – encouraged, permitted, restricted and prohibited – to guide foreign investment in China.

The NDRC specifically mentioned that The Blackstone Group, which is in the middle of raising an RMB fund equivalent to $800 million, will need to comply with the catalogue.

The ruling undermined what had been perceived as a Qualified Foreign Limited Partner Program (QFLP) benefit: it brought foreign GPs the same privileges enjoyed by domestic GPs.

But that was only an industry hope, not a government intention, said Hony Capital co-founder John Zhao.

“The QFLP was designed to solve the convenience issue with currency conversion,” added Zhao. “It was never meant to be more than that. Of course there were efforts to push further, but that was turned down. I was always very clear from day one that the QFLP [aimed to solve] one problem, but not all.”

The VIE has come under much scrutiny this past year, but the government has refrained from making any definitive statements or regulations regarding it for the past six months, according to Steven Xiang, head of the China practice at Weil, Gotshal & Manges.

At the same time, many more sectors have been cleared for private equity investment, including domestic mutual funds and China’s multi-billion-yuan insurance industry. Local governments, like Shenzhen and Shanghai, have also been trying to encourage offshore RMB to return to the country by loosening restrictions – something Hony Capital hopes to take advantage of with its next fund, according to Zhao.