Queen: Chinese market has to change

3i's Michael Queen argues the biggest question facing European PE firms was how best to access growth in emerging markets like China, a market he said would have to change.

Michael Queen, chief executive of UK-listed private equity group 3i, hailed emerging markets as a beacon of hope for the private equity industry during his keynote speech at the British Private Equity and Venture Capital Association's annual summit in London on Thursday.

Queen highlighted the likes of China and Brazil as key investment destinations. He also confirmed plans to raise an RMB-denominated fund for China.

He singled out China as a key territory for European private equity firms. “China will regain its position as the world’s largest economy soon,” he said. “We’ve already enjoyed success there with Little Sheep [a chain of hot-pot restaurants it exited in 2009], which we took from start-up to a business with 700 outlets.”

But China has become a victim of its own popularity, he suggested. “There are now four [private equity] funds for every deal done in China,” he said. “So by that metric, a firm will do one deal every four years. Something needs to change. There either needs to be huge growth in the market [in terms of deals done] or there needs to be consolidation.”

Queen said having an RMB-denominated fund speeds up the investment approval process enormously, from six to nine months for a foreign currency-denominated fund to just one or two months if the investment is made in RMB. “Our next fund doing deals there will be RMB-denominated,” he said.

Queen also said China was changing as its population growth slows, creating a shift in the country’s economy from a manufacturing-based to a consumer-based one. This will create new opportunities for private equity to invest in the region, he said.

Commenting on other markets, he highlighted India as being particularly conducive to investment due to its relative political stability and attractive fundamentals. He revealed it would be 3i’s largest market this year in terms of assets under management.

Despite citing figures which suggest the G7 nations will be overtaken by emerging economies like China and India in due course, Queen said: “Great European businesses will be some of the biggest beneficiaries of growth in emerging markets. And in terms of emerging markets themselves, growth won’t be straightforward. As a result, investment decision-making will be extremely tough.”

“Maturing private equity markets will amplify GDP growth in developing countries,” Queen added.

Looking beyond the BRIC nations, Queen singled out Indonesia, Africa, Mexico and Turkey as the most promising of the next crop of emerging investment destinations.