In 2010, the Chinese economy grew by 10.4 percent year-on-year. By 2013, this figure had slipped to 7.7 percent, according to World Bank data, reflecting the fact that China’s economy expansion is continuing to slow. Further evidence of this emerged in Q3 of this year, which showed a 7.3 increase in GDP.
But in an age where growth of any kind is elusive almost anywhere, these numbers certainly have some appeal. From a macro perspective, it isn’t surprising that LP interest in the Chinese market appears to be coming back.
China funds have been actively raising capital, collecting $8.4 billion from investors this year (to November), already a 42 percent jump from the $5.9 billion raised during the whole of last year, as data from PEI’s Research & Analytics division shows.
To be sure, this year’s figure pales in comparison with the $44.6 billion and $23.7 billion raised by China-focused funds in 2011 and 2012 respectively, but it does suggest a recovery in appetite.
Chinese private equity’s big dilemma is that it doesn’t really need any more money. According to Bain, the consultancy, the country was left sitting on about $65 billion of undeployed capital as of the end of 2013 – an increase of about 20 percent from 2012.
Still, the increase in investment activity that will be required to work off the overhang appears to be coming. Investment values are up 167 percent this year, with firms injecting $13 billion into deals by mid-November, compared to just $4.9 billion invested in 2013, according to data from Thomson Reuters.
China’s booming internet sector and highly specialised areas such as food safety are providing investment opportunities. However, large buyouts have been thin on the ground, forcing managers to come up with creative deal-sourcing solutions.
One strategy has been to look for Chinese businesses incorporated overseas. In July 2014, Baring Private Equity Asia and Hony Capital completed the $3 billion take-private of Chinese gaming firm Giant Interactive from the New York Stock Exchange, the latest in a string of public-to-private transactions involving US-listed Chinese businesses.
In November, KKR’s Asian fund joined up with CITIC Group, one of China’s largest conglomerates, to propose the $1 billion privatisation of Singapore-listed water treatment firm United Envirotech, which has the majority of its operations in China.
Firms are also creating deal flow by buying offshore assets to expand them into China. Hony, which is one of the country’s largest domestic firms, took to the UK in July, signing a £900 million ($1.5 billion) agreement to buy restaurant chain PizzaExpress from Gondola Group, itself a private equity-backed operator. The deal came as PizzaExpress opened its first restaurant in Beijing, already having 12 sites in Hong Kong and nine in Shanghai.
Baring has also targeted offshore assets to capitalise on their growth potential in Asia. In July, the Hong Kong-headquartered house acquired UK-based fashion house Cath Kidston before investing in Grenada’s St. George University in August – both times with Chinese expansion opportunities in mind.
“Private equity firms in China are facing a tough time, it is difficult for them to find [sizeable] assets,” explains Henri-Pierre Vacher, Greater China partner at OC&C, a strategy consultancy. He says the number of Chinese firms investing abroad is at a peak, and believes the trend will continue: “We are at a point where [cross-border deals] will escalate quickly – we have never seen this kind of dealflow and closed deals before.”
Given the level of competition for buyouts in most markets, Chinese GPs will have to pay full prices for assets abroad. Swift execution of any expansion strategy back home will be essential to make these deals work.