China special: seven things you should know

1 THE CONSUMER IS KING
Chinese growth may have slowed, but a newly affluent middle class looks set to drive the consumer sector to new heights, opening up opportunities for the private equity industry. “We have noticed the strong consumption and service-related sectors taking off in the last few years,” says Guy Cui, a Beijing-based managing director with Baring Private Equity Asia.

2 ALL EYES ARE ON THE MILLENNIALS

This consumer cohort of 400 million is bigger than the entire US population, and is expected to have a huge influence on China’s economy, thanks to the “tech-enabled” lifestyle of this “straight to mobile” generation, says Chris Lerner, head of Asia for Eaton Partners. The aggregate income of Chinese millennials is set to more than double to $5.2 trillion by 2024 as they enter their prime, according to Goldman Sachs.

3 OUTBOUND DEALS ARE AT RECORD LEVELS
Outbound deals doubled last year to reach $185 billion, according to Mergermarket, spurring competition in the M&A market. A survey by MVision Private Equity Advisers and the London Business School found that more than a quarter of GPs say they lost out to a Chinese bidder in auction processes during 2016. More than three-quarters of GPs believe increasing numbers of Chinese bidders are driving up valuations, according to the survey.

4 CHINESE GPs HAVE DEEP POCKETS
While corporate buyers – including family offices – are the most commonly seen type of bidder, China has a well-developed, well-funded general partner community, says Mounir Guen, chief executive officer at MVision. “There are some prominent groups in Asia, China in particular. China is the only country outside Europe and the US that has a group of general partners that have funds in excess of $3 billion,” he says.

5 THE DISTRESSED MARKET IS LURING FOREIGN INVESTORS

China’s $615 billion distressed market is attracting overseas interest with the Ontario Teachers’ Pension Plan among those looking for bargains. “Structural reforms in China and India such as real plans in terms of zombie companies, changes to the bankruptcy system and asset management companies are positive signs,” director of alternatives Mark Katz told the Private Debt Investor Asia Forum in Hong Kong. “It’s definitely a good time to take a hard look at this space.”

6 FUNDRAISING REMAINS STRONG
China-focused funds raised $17.18 billion in 2016, which while down on 2015 levels comfortably exceeded the 2013 and 2014 totals. Hony Capital Fund VIII, FountainVest China Capital Partners Fund III and Warburg Pincus China Fund were the biggest funds to close last year. The $2.7 billion Hony fund aims to provide growth capital to Chinese businesses in the construction, pharmaceuticals, consumer goods, retail, energy and financial services sectors, with a particular focus on Chinese state-owned enterprises.

7 GOOD DEALS ARE BECOMING DIFFICULT TO FIND
Private equity participants agree that while there are plenty of potential deals, high valuations are a sticking point. Actis’s Beijing-based partner Max Lin says education and healthcare are attractive sectors, particularly the pharmaceutical sector. “With increased investment on research and development, many Chinese med-tech companies are starting to compete with global multinationals, starting from the Chinese domestic market,” he says.