Vibrant China

China's private equity industry began the year on shaky ground and ended it with a prediction that it would one day become the world's largest. Jenny Blinch looks at a fluctuating year

The start of 2009 saw China suffering. In private equity terms, it looked almost as if the wheels might be coming off what in 2008 had been a runaway train.

With the country's A-share markets effectively closed to new listings by the government in order to curb the hemorrhaging of capital, the pre-IPO market was on a road to nowhere. With GPs forced to hold companies for longer, it became apparent in many cases that predeal due diligence had been cursory to say the least. Fraud, shaky finances and poor corporate governance were all issues GPs were forced to contend with as the tide of growth ebbed away, leaving the true value of investee companies exposed.

But while many GPs were struggling to deal with problems at portfolio companies, the growth of China's domestic private equity industry continued.

RMB fund launches, given the green light by the government with the passing of the Partnership Law in 2007, proliferated even as US dollar-denominated fundraising tailed off (see chart p. 45), accounting for all fundraising recorded by Chinese private equity data provider Zero2IPO in Q3 2009.

That's not to say foreign investor appetite for China disappeared. Though fundraising across all emerging markets sank in line with fundraising across the globe, H1 2009 statistics from the Emerging Markets Private Equity Association showed that China still accounted for 24 percent of all emerging markets fundraising in the period, compared with 21 percent in 2008. In the broader context that emerging markets fundraising accounted for a greater share of all fundraising in H1 2009, this would suggest global LP appetite for China is holding strong, if not rising.

For foreign GPs, China has remained as compelling as ever. In fact, by the second half of the year, when it was clear China's economic growth would continue pretty much unabated thanks to swift and decisive government action at the start of the downturn, China seemed to have eased any doubts over its attractiveness as an investment destination and gained a bigger following than before.

For the ever-increasing number of foreign GPs eyeing China, good news came in the form of the launch by the Shanghai Government of the Trial Measure for the Establishment of Foreign-invested Equity Investment Management Enterprises: a one-year policy allowing foreign private equity and venture capital firms to register onshore entities in the Shanghai Pudong New Area.

Though the ability of foreign firms to operate on an equal footing with domestic private equity players in the Chinese private equity industry is unclear – and subject, it seems, to constant revision – it did not take long before a host of foreign GPs signed up. Among them were Blackstone Group, First Eastern Group, The Carlyle Group, Prax Capital, Abax Global Capital, and, reportedly, KKR.


Breakdown by currency of new money raised for China-focused funds from Q1 to Q3 2009
Currency Amt. Raised % of Total No. of New Funds
Foreign Currency 500.00 100.00% 2
RMB 0 0 0
Total 500.00 100.00% 2
Currency Amt. Raised % of Total No. of New Funds
Foreign Currency 1,600.00 87.90% 3
RMB 219.62 12.10% 2
Total 1,819.62 100.00% 5
Currency Amt. Raised % of Total No. of New Funds
Foreign Currency 0 0% 0
RMB 2467.06 100.00% 6
Total 2467.06 100.00% 6