GPs investing in China believe that the level of competition from RMB funds for deals has eased, according to a survey report by Bain & Company. It showed that 50 percent of the 18 GPs surveyed said that they expected RMB funds to have no effect on their deal-doing capabilities, compared to 10 percent that said the same in 2011.
“Back then, people still didn’t know what [RMB managers] could do and were looking at the sheer amount of money being raised – that was when concern picked up,” Derek Deng, manager at Bain & Company, explained to Private Equity International.
“After a while, RMB funds certainly [showed] they have their own limitations in terms of exit routes, because they still need to go through the IPO process and they are much less flexible than some of the foreign funds in terms of where to list or how to exit.”
After a while, RMB funds certainly [showed] they have their own
Derek Deng, manager, Bain & Company
RMB funds are holding a huge number of assets as they face a four year-long waiting list to IPO their portfolio companies in China. Some firms are beginning to look at raising US dollar-denominated vehicles to create more flexibility in their investment strategies, rather than relying on the typical pre-IPO play they have previously subscribed to, industry sources said.
The survey also showed that the number of China firms that will likely raise RMB-denominated vehicles over the next two-to-three years has decreased to 40 percent from 50 percent in 2011.
However, Deng asserts that there is still demand for RMB vehicles as investors continue to look for ways to use their capital. “If you look at the data, actually 40 percent of the survey says it is very likely they will raise an RMB fund in the next two-to-three years. There is still money pouring into the market [in China], and that won’t change – especially for RMB.”
He continued, “The number of high net-worth individuals in China with RMB wealth is still climbing and their investment options are actually still very limited, given the uncertainty of the real estate market and also [because] the stock market isn’t performing very well.”
Another part of the survey, which focused on China's investment climate, found that the number of managers concerned about finding attractive companies to invest in has risen to 70 percent, compared to just 30 percent that said this was the greatest constraint in 2011.
Due to the abundance of capital still in China’s private equity market ($59 billion in dry powder remained at the end of 2012, according to Bain), firms must be wary of investing in low-par businesses just to deploy their funds.
“There are definitely going to be fewer deals to do, but [GPs] keep raising money and the need to [deploy] this money will make them accept some of the less ideal targets to work with,” Deng says.
Firms are in danger of not being able to exit these companies down the line and repeating the mistakes of firms in previous years that invested in businesses purely on the basis of China’s growth, he added.