Study: China’s LPs pull back from PE

A lack of quick returns has made many China LPs think twice about committing to private equity funds, according to a Zero2IPO study.

The average capital commitment of LPs to Chinese private equity fund dropped to $110 million last year, down from $150 million in 2011, according to a recent Zero2IPO study. Sources suggest that many LPs are becoming disillusioned with private equity fund managers and prefer to do investments themselves.

The pullback is evident in China’s largest group of private equity investors: listed companies. Up to 2011, 150 listed companies in China had a total of $217 billion that they could potentially invest in domestic private equity.

In 2012, there were around 321 listed companies that could invest in private equity, but total potential capital dropped to $212 billion, according to Zero2IPO’s research.

The size of each LP investment varies widely, according to Zero2IPO research. For example, Digital China invested RMB 350 million (€43 million; $56 million) in Tianjin Xinrui Fund in 2011, while Fangda Tansu (a Shanghai listed company) committed only RMB 95 million to CITIC Private Equity Fund I in 2010.

Also in 2012, the number of domestic LPs jumped 52 percent to 7500.

The increase in the number of LPs has partly to do with regulations, according to Edwin Zhang, analyst at Zero2IPO. Until a few years ago, many major investors in China’s private equity industry – listed companies, mutual funds, and even insurance companies – were not allowed to invest in private equity. The past few years saw many of those restrictions removed.

At the same time, however, one Asia-focused LP believes that many China LPs have simply lost interest in waiting for returns that are potentially higher than liquid investments. High-net-worth individuals and family offices, for example, often need the cash for their own businesses.