Private equity in China may see a record number of new investments and perhaps even start toward a record number of exits in 2013, despite the substantial drop in deals, fundraising and exits in 2012.
The low numbers are exactly where the pressure is building, according to David Brown, PricewaterhouseCoopers private equity Greater China leader. “There is a lot of pent-up demand in the system,” Brown told Private Equity International.
Fund managers, both those raising funds denominated in US dollars and RMB, raised $12.1 billion in 2012 and $26.5 billion in 2011, according to PEI's data division. GPs are now “under pressure to use that money”, Brown said. That is actually good news for private equity firms wanting to close new deals, he added, because “the demand for capital in China is still there and real”.
Exits may also spike, Brown said. There are more than 7,550 unexited investments in China, according to a China First Capital report. Brown expects to see more trade sales than secondaries, but both should increase. If the public markets recover, China might have a record year of private equity-backed IPO exits, Brown says, but that is less certain.
“I’m just not sure it will happen fast enough for us to see a record 2013,” he said.
One of the main reasons for the slowdown in 2012 was that private equity firms have been waiting for lowered valuations, he said. Firms believed it was better to wait until the year-end results of 2012 came in. Then entrepreneurs could see that profits were not as high as expected, and private equity could point to that to negotiate lower valuations. In the report, Brown called this a “time lag factor”.
“It’s not that deals aren’t there, it’s that people are slowing down,” Brown explained. He expects that many deals in the pipeline now will start to come through in 2013.
However, private equity firms are not confident that 2013 will be a good year all around. Especially on the RMB side, CITIC Capital chief executive Yichen Zhang believes that LPs will start to become more demanding for returns as exits become scarce, and may even pull back on their capital commitments.
“The worst is yet to come,” Zhang said last week at the HKVCA Asia Private Equity Forum.