China’s domestic private equity (PE) industry is not unlike a young child – in its early stages of development, but growing quickly. Each new variety of participant gives an added spurt, and the roster now stretches to local governments, private corporations, and financial services providers, as well as dedicated PE players.
"The importance of these local funds is increasing quite a bit because they don’t have the restrictions on deploying capital in China the way some of these global funds do," said Bob Partridge, managing director and Far East transaction advisory services leader at Ernst & Young.
According to Zero2IPO, a PE consultancy, there has been a steady increase in the number of domestic PE funds since January of last year. Most of the activity was seen in the fourth quarter of 2008 when 10 funds opened shop and raised a total of US$5.9 billion.
The big players remain state-backed funds such as the Bohai Industrial Investment Fund and GP Capital, a joint venture between the Shanghai government and China International Capital Corp. Independent PE funds still tend to be quite small. The likes of Hopu Investment Management and Hony Capital, the PE arm of Legend Holdings, parent company of PC maker Lenovo, are the exception to the rule.
Financial services companies are relatively new to the market, but they are expected to have an impact. As of July, nine brokerages had received approval to create PE funds, including CITIC Securities, Guoyuan Securities and Huatai Securities. In addition to a cash windfall, a portfolio company’s listing may also boost the brokerages’ underwriting business.
Trust companies, local government financing tools turned full-service commercial entities, are already agressively pursuing early-stage PE. However, they are barred from investing their own funds.
"Some trust companies had bad assets on their balance sheets from when everyone was doing pre-IPO deals three years ago … so the regulator said they couldn’t do principal investment and only raise money through investors," said Richard Williamson, managing director of Asia Harvest, a PE consultancy.
The asset management arms of insurance firms, meanwhile, are much slower to get into PE, though they are restricted to being limited partners. According to Williamson, they are most likely to invest in government-backed PE funds.
At the bottom of the PE food chain are private companies and high net-worth individuals. These players have capital at their disposal, but they often lack professionalism and are not interested in long-term investments.
The inevitable consequence of having so many new PE participants is a shortage of qualified staff. Robert Abbanat, managing director of M1 Capital China, believes local government funds will bring order to the industry and facilitate the next stage of its development.
"I think these government funds are likely to improve the industry and improve professionalism," he said. "They have the resources to go out and hire talented people."