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Coming of age

China’s private equity sector is becoming a global force and playing a role in the country’s economic transformation

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May 22-28, 2017
By KARL WILSON
in Sydney
karlwilson@chinadailyapac.com

Just over a decade ago, private equity was relatively unheard of in China. That is no longer the case.

Chinese private equity firms such as Legend Capital, AGIC Capital and Golden Brick Capital Management have emerged as major players, especially for small and medium-sized privately owned enterprises.

Private equity is playing a major role in the growth of the technology sector, which is a key plank in China’s economic transformation.

China’s private equity sector is coming of age, fueled by the country’s growing wealth, the increasing sophistication of its investors and their desire to gain exposure to overseas assets.

It has grown from what some analysts used to describe as a “buy and flip” industry to one that is well regulated and on par with many of the world’s major private equity players.

Despite recent growth concerns, investors still view China among the most important investment destinations globally.

“Private equity fundraising has become even more competitive at the top end of the industry, especially with the emergence of State-backed vehicles in the Chinese market,” according to Christopher Elvin, head of private equity products at Preqin, a data and analysis group for the alternative assets industry.

“The development of the venture capital industry in China has played a key role in the growth of the Asian market, and the country is now beginning to rival Silicon Valley as a hub of activity,” Elvin told China Daily Asia Weekly.

“The Chinese government has looked to encourage entrepreneurship by providing support and financing for startups alongside private firms,” he said.

“Managers will have to prove that they can provide the strong returns that investors demand in order to ensure that the current boom in fundraising can translate into a long-term ascendancy.”

People walk along the Nanjing shopping street in Shanghai on May 1. Consumption-driven investment is the focus of most private equity firms, due to the growing Chinese middle class. Credit: ImagineChina

Mei-ni Yang, private equity specialist with Mercer Private Markets, said: “Overall private equity manager sophistication has been increasing, driven by the need to add value post-investment, manage risks and become creative in generating exits.

“In addition to traditional sector-agnostic (not industry-specific) growth capital funds which have been prevalent in the last 10 years, we have observed the emergence of sector-specialist teams in areas such as technology, healthcare and the consumer sector,” she said.

“Consumption-driven investment themes continue to be the focus of most managers, both sector-agnostic and sector-specific, given the continual expansion of the Chinese middle class and urbanization, coupled with traditionally high household savings that are gradually channeled toward a more liberal consumer profile.”

Yang said that while in years past, listings have been the main mode of divestment for Chinese general partners (another term for private equity firms), government intervention has led to relatively unreliable initial public offering windows.

“Significant developments in the Chinese economy have also driven an increase in cross-border private equity deals, as well as outbound investments of Chinese managers overseas, to capitalize on new knowledge domains and skill sets,” she said.

“The local investor community is also becoming more institutionalized, underpinned by more progressive regulations and the proliferation of more suitable investment opportunities.”

Last year, Chinese private equity firms took part in the $3.6 billion takeover of US printer company Lexmark International, the $2.75 billion purchase of Dutch chipmaker NXP Semiconductors’ standard products unit, and the $600 million acquisition of Oslo-based Opera Software’s Web browser business.

In 2016, for the first time, the sum of overseas transactions by Chinese private equity firms was higher than that of Asian deals by foreign private equity players, according to Asian Venture Capital Journal.

“These Chinese funds are already beginning to alter the calculus for buyout deals worldwide,” Peter Fuhrman, chairman and CEO of China First Capital, a Shenzhen-based investment banking and advisory firm, told Bloomberg.

“It’s about buying companies that, once they have Chinese owners, can start making really big money selling products in China,” he said. “The big cats of the buyout jungle are mainly sitting on their haunches. They aren’t currently built to engage in these kinds of deals.”

Chinese private equity firms are gaining significant power from the nation’s growing army of high-net-worth individuals.

There is a lot of domestic capital available, obviously looking for a home, and that is fueling the emergence of these funds, according to Bain & Co, a Boston-based consulting firm.

Bain said private equity deals last year in China — including the Chinese mainland, Macao, Hong Kong and Taiwan — were valued at $49 billion. This was down on the previous year’s figure of $72 billion, although 2015 was considered to be a blockbuster year. And Internet-related deals accounted for 48 percent of that deal volume last year, compared to just 16 percent in 2012.

Growth in deal activity has been driven by a number of large deals in excess of $100 million, Kiki Yang, a partner in Bain’s Hong Kong office and a leader in the firm’s Greater China Private Equity practice, told China Daily Asia Weekly. She said deal sizes have increased, growing from $93 million in 2012 to $112 million last year.

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“Alternative capital” such as State-backed funds and financial services companies have been especially active in Asia Pacific and China, she said.

China private equity deal momentum will likely remain strong, Kiki Yang said. “Alternative capital shows no signs of slowing down as investors have significant cash to deploy.”

She added: “Intensifying competition will likely keep valuations high, which may dampen activity and post risk to returns.”

According to Bain, a majority of the US- and Europe-based funds that, individually, raised an accumulated $5 billion or more in 2012-16 have a focus on China.

It is included in the mandates of some 70 percent of US-based large funds and 83 percent of Europe-based large funds, Kiki Yang said, and remains highly attractive due to the “large and growing economy, solid history of returns, and multiple success stories of successful foreign private equity funds”.

She said that with the growth of China’s private equity sector, foreign funds have lost market share. In 2012 they participated in 44 percent of deal value in China, but that slid to just 23 percent last year.

“The Greater China private equity deal market is increasingly dominated by large Asian sovereign wealth funds and domestic players,” Yang said, adding that risks for global funds included this intensifying competition as well as the more volatile exit market.

Signs point toward a bigger role for Chinese private equity firms, both at home and abroad.

Given that China is still growing faster than most major countries, any private equity firm with the ability to help companies thrive there will have a leg up on international competitors, said Henry Cai, the former Deutsche Bank investment banker who started AGIC Capital.

“Few companies nowadays would care about the money or how much you pay them,” Cai told Bloomberg. “They care if the investor can help them break into the Greater China market.”

Some of the biggest deals so far this year involving Chinese private equity companies have been in the Internet space, and involving limited partners.

Key examples include the $4.5 billion investment in Alibaba affiliate Ant Financial Services Group led by China Investment Corp; the $4.4 billion merger and privatization of Chinese travel website operator Qunar by Ocean Management; LeEco unit LeSports’ $1.2 billion Series B funding round led by HNA Capital; and the $1 billion investment in JD.com subsidiary JD Finance by Sequoia China, China Harvest Investments and China Taiping Insurance.

Funding Asia’s corporate growth Private equity firms wake up to region’s potential as middle-class population expands and innovative startups prosper

May 22-28, 2017
By KARL WILSON in Sydney
karlwilson@chinadailyapac.com

Private equity was once the sole domain of cashed-up US and European funds.

That perception has changed due to the growth of China and its knock-on effect throughout Asia. Economic growth has seen millions taken out of poverty and has created an expanding middle class.

Asian businesses such as startup tech companies have become sought-after targets for private equity.

Last year saw Indonesia’s on-demand motorbike taxi service Go-Jek raise $550 million, led by private equity firms KKR & Co and Warburg Pincus.

Another is ride-sharing service Grab, launched in Malaysia and now available in several countries across the region. It raised $750 million, led by Japanese corporation the SoftBank Group.

With Southeast Asia growing at a faster clip than Europe and the United States, private equity is well placed as the “capital pool of choice” for investors, said Luke Pais, leader for private equity in the Association of Southeast Asian Nations region at professional services firm EY.

“Entrepreneurs need good partners and there is no better partner than private equity to create long-term sustainable value,” he said.

The growing volatility on global equity and currency markets, threats of trade wars, growing protectionism and increasing debt levels have had little impact on private equity investors in Southeast Asia.

Last year was the third successive year that the private equity industry in the region performed at historic or near historic levels.

Indonesia, the Philippines, Thailand and Vietnam have seen enormous corporate growth in recent years but to continue that expansion and grow beyond domestic borders they will need capital.

Entrepreneurs must look beyond traditional bank financing and retained earnings to fund their growth aspirations — and private equity is one of those vehicles, Pais said in EY’s latest Private Equity Briefing report.

Suvir Varma, head of the Asia-Pacific private equity practice with Bain & Company, a business consulting firm, said that while investors in the region keep an eye on global challenges, “these trends have yet to impact the region’s private equity market”.

“Asia-Pacific private equity funds still have ample attractive opportunities as global volatility has not hit earnings of companies in the region, and there is still strong investor interest in Asia-Pacific given Asia-Pacific private equity’s high returns — especially relative to public markets,” he told China Daily Asia Weekly.

“Having said that, leading private equity investors are increasingly incorporating macro scenario planning into due diligence and portfolio reviews, to pre-emptively identify any potential risks and ‘weatherproof’ their portfolio companies.”

Last year, the value of private equity deals in Asia Pacific topped $92 billion — a pullback from $124 billion in 2015. Even so, 2016 was still the second-best year on record, according to Bain & Company.

In Southeast Asia, deal value bounced back from $4.8 billion in 2015 to $6.8 billion last year, 14 percent higher than the 2011-15 historical average.

Singapore continues to be the largest market in Southeast Asia, accounting for around 40 percent of Southeast Asian deal value from 2012-16.

The entry of new types of players such as corporates, limited partners and sovereign wealth funds has resulted in intensifying competition.

“Sources of value are shifting across Asia Pacific, making it tougher to deliver outsized returns,” Varma said.

General partners — as private equity firms are also known — are working with near record levels of unspent capital. Varma said firms in Singapore will find it increasingly important to develop a differentiated angle across the value chain.

“They will need to develop smarter sourcing to build a robust pipeline around their deal sweet spot, enhance due diligence capabilities to develop proprietary views on their targets, and double down on portfolio value creation so they can get a head start from day one,” he said.

“Many general partners based out of Singapore are also diversifying their investment strategies by targeting investments in other Southeast Asian markets, like Indonesia, Malaysia and Vietnam.”

Analysts say sovereign wealth funds are devoting more and more of their private equity allocations to direct investments. Areas such as healthcare and technology have become major targets.

Late last year, Singapore-listed company New Silkroutes Group formed a joint venture with three parties, including the Singapore subsidiary of China’s Nanshan Group. The project aims to develop private equity funds to focus on healthcare and infrastructure in Asia Pacific, including Japan and Australia.

Caption…. A driver with motorbike taxi service Go-Jek in Jakarta in June 2015. Last year the Indonesian startup raised $550 million, led by private equity firms KKR & Co and Warburg Pincus.  Credit:  AFP

The new Singapore-incorporated entity, New Silkroutes Asset Management, will initially focus on the healthcare sector.

The number of people in the middle class in Asia Pacific is expected to rise to 3.2 billion by 2030 from 525 million in 2009, according to the Organisation for Economic Co-operation and Development.

This increase, together with growing affluence, is expected to drive demand for better quality medical treatment and care.

Analysts say private equity still has a strong appetite for high-growth technology companies.

Internet, technology, media and telecoms companies attracted $42 billion, or 45 percent, of total investment value last year. Internet deals alone accounted for more than a third of the total, continuing a five-year trend, according to Bain & Company data.

However, in its Asia-Pacific Private Equity Report 2017, Bain & Company warned of harder times ahead.

“As powerful as the growth story is in the Asia-Pacific region, however, there are many reasons to believe that generating returns at current price multiples will only get tougher. Competition for deals is likely to burn hotter in the years ahead.”

More than 80 percent of the general partners surveyed said that they feel the current level of competition has increased.

“They are most worried about pressure from other regional and local private equity funds, as well as strategic corporate buyers looking for opportunities to expand their footprint in the region.”

However, Tan Choon Leng, head of private wealth practice at RHTLaw Taylor Wessing in Singapore, sees plenty of activity ahead for the sector. “This market is definitely receiving greater private equity attention than it has in the past and is likely to keep private equity houses very busy for the foreseeable future,” he said.

Tan cited Baring Private Equity Asia’s $137 million investment in Telus International, a business process outsourcing company in the Philippines.

The Philippine economy expanded last year at its quickest pace in three years. The growth rate of 6.8 percent makes it one of the fastest growing economies in Asia.

Other than the Philippines, Indonesia is also attracting private equity attention after the completion of its tax amnesty in the first quarter of 2017 and the increase in the number of sectors open to foreign investment.

Bill Jamieson, partner, head, funds and financial services practice group at Colin Ng & Partners, told Singapore Business Review recently: “Singapore is the private equity hub of Southeast Asia and a hub for private equity firms looking to invest into India.

“Hence, when we discuss private equity in Singapore we must necessarily discuss the investment opportunities in the region,” he said.

Jamieson said the privatization of state-owned entities in countries such as Vietnam presents “once-in-a-lifetime opportunities” for private equity players.

PwC predicts that seven of the world’s 12 biggest economies in 2030 will come from emerging markets, which is why private equity houses are ramping up their presence in Singapore.

“We are seeing a more active private equity market with more international private equity players setting up office in Singapore over the recent years,” Ling Tok Hong, private equity leader at PwC Singapore, told Singapore Business Review.

“This demonstrates the keen interest of private equity in Singapore and the region, in line with a megatrend — we are seeing a shift in global economic power from west to east as well as the growing middle-class population in the region.”

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