Private equity deal value in China dropped to $19.8 billion in 2012 from $27.6 billion the previous year, according to a recent Zero2IPO study. The number of deals also fell slightly to 680 from 695 in 2011.
PIPE deals, which have been popular with China’s private equity firms, decreased dramatically. The aggregate value of all PIPE deals in China dropped to $4.8 billion from $6.9 billion last year.
Private equity real estate, however, told a different story. Deal value in real estate surged 60 percent, to $3.1 billion from $1.9 billion in 2011. Real estate’s share of total private equity deals grew to 16 percent from 7 percent last year, the studies show.
China fundraising showed a similar pattern. Overall, private equity fundraising dropped to $25.3 billion from $38.9 billion in 2011, though the number of funds raised increased to 369 from 235.
Real estate, on the other hand, had a very slight increase to $6 billion raised across 94 funds, up from $5.8 billion raised across 67 funds in 2011, according to the study.
A factor encouraging real estate investment may be the exit situation. Private equity’s widely preferred IPO exit route has been frozen due to low stock market valuations and a long exit queue. But real estate investments in China are typically not exited through IPOs, according to Zero2IPO analyst Jessie Zheng.
KPMG partner Stephen Ip agrees. “There is definitely more flexibility in real estate investment upon exit, because there are a greater range of buyers available,” he told Private Equity International. In China, real estate exits are usually through trade sales or corporate buyouts, he said, many of which can partner with the private equity firm from the beginning of the project.
Real estate is also interrelated with government policies, Zheng added, and in 2012 regulators had a neutral to favourable on capital flows into real estate.
But going into 2013, Zheng adds that a continued rise in real estate deal value will depend on how the new leadership, coming to power in March, will view the asset class. The first half of this year will be the main determinant for future private equity real estate in the country, she said.
At the same time, Business Monitor International is worried that China’s real estate market is becoming a “bubble territory”, and could be poised for a “hard landing” soon, PEI reported earlier.