Private equity firms eye opportunities in China, but weigh options carefully

Global private equity firms are optimistic about China despite lacklustre market performance in recent years resulting from slowing economic growth and increased regulatory oversight from the US that has weighed on fundraising.

China’s private equity sector was previously momentum-centric, but it has been developing fast and maturing rapidly, Warburg Pincus CEO Chip Kaye told the Post.

“We’re sort of thinking about the domestic capital markets in China, the massive savings pool, and how it will be better managed and invested,” he said. “There are some positive tailwinds around it.”

The New York-based private equity firm, which has more than US$84 billion in assets under management, has been investing in China for the past 30 years, where it has deployed US$16.5 billion across some 160 companies. Some of its most recent investments include hospital chain United Family Healthcare and asset management firm Zhong Ou AMC.

Private equity investments in China have been affected since US President Joe Biden announced in August plans for new restrictions on investments that American companies can make overseas. The measures require more disclosure by American companies when they invest in a broad range of Chinese companies and are aimed at blunting China’s access to technologies that could undermine US national security.

Global private equity firms with exposure to China have historically relied on the country’s strong domestic growth and liquid capital markets to generate returns.

However, the growth momentum has slowed in recent years, with China-focused private equity and venture capital funds generating an average annual return of negative 5.6 per cent in 2022, according to data from Burgiss, a provider of data and analytics solutions.

Decreased returns have also led to challenges in fundraising, with global fund managers focused on China raising only US$5.6 billion as of September this year, a decline of more than 70 per cent from 2022 levels, according to industry data.

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Kaye said the broad market averages in China have stayed flat over the past decade. This, he said, signifies a maturation, rather than a slowdown, in the country’s private equity environment.

The sentiment was echoed by Zhang Yichen, chairman and CEO of Hong Kong-based Trustar Capital, the private equity affiliate of Citic Capital Holdings.

Zhang said China’s slowing gross domestic product (GDP) growth and regulatory challenges are a “perfect storm” that can create opportunities for buyouts.

“We’re seeing a lot of corporate carve outs; multinationals want to reduce their exposure in China, but do not want to leave completely,” he said at the Global Financial Leaders’ Investment Summit hosted by the Hong Kong Monetary Authority on Wednesday.

“They are looking for partners who can help them navigate [the transition] better, or at least who can deflect some of the geopolitical tensions for them.”

Zhang and Kaye took part in a panel discussion on Asia and mainland China markets along with Lei Zhang, the founder and chairman of Hillhouse.

Zhang said McDonald’s China, one of Trustar’s portfolio companies, has seen more than 20 per cent growth this year.

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Separately, Juan Delgato-Moreira, vice-chairman of global investment manager Hamilton Lane, told the Post that private credit could be another source of opportunities in China and Asia.

“You see private credit and direct lending in the developed parts of Asia, but will see more of that in China,” Delgado-Moreira said.

“As capital is repriced, private markets can do a lot of direct lending, just as we do in the US or Europe.”

Paul Marshall, chief investment officer and chairman of British hedge fund Marshall Wace, said China has for many years been “the best alpha market in the world for us”.

“[But] this year has been harder. It’s a very liquid market, [and] the second most liquid market in the world behind the US,” he said.

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