Market participants have agreed that private equity houses can no longer rely on China’s growth rate for investment success. Instead they must find companies with better business models.
Speaking at the Hong Kong Venture Capital Association’s 13th China Private Equity Forum in Hong Kong on Friday, GPs agreed that easy growth is no longer available in China. Instead private equity must look for companies that deliver better business models and strategies.
That will require new strategies and will take time. Panellists predicted that 2014 and 2015 would be slow years for private equity – particularly the exit market – as the Chinese economy rebalances, but were positive for long-term investment.
“Easy growth is no longer available,” said Paul Yang, co-founder and chairman of CDIB Capital International Investment, adding that businesses can no longer grow because of the sheer size of the market.
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"Owners are having self-doubts, and are actively seeking help from experienced private equity" |
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“Today we’re seeing the best growth from companies that deliver a better model – a better mousetrap – thereby removing a lot of inefficiencies in the market,” he said.
Panellists were sanguine about long-term growth. But William Shen, senior partner and head of greater China at Headland Capital Partners, believed 2014 would be a tough year for target companies, and therefore a tough year for private equity.
The market has changed since changed since 2007 to 2010, in which companies in fast-growing industries didn’t have to excel as long as they kept up with competitors. Because the market was growing, they could generate 20% to 25% year-on-year returns, he said.
That’s no longer the case. Instead, he added, funds are seeking a specific company with a clear core competency and sustainable growth, as well as excellent management.
KEY TAKEAWAYS
Private equity firms in China can no longer rely on fast-growing industry growth for their own portfolio growth;
Instead they must find companies with strong businesses and management;
While private equity has had a difficult time in China – especially with exits – economic rebalancing has also affected target companies.
Target receptiveness
However, China’s rebalancing economy may benefit private equity because it has changed target companies’ attitude towards investment.
Five to six years ago, founders were asking whether private equity firms competing for an investment were good to work with and whether they offered better terms, Shen said. Founders would argue that they were generating 30% growth year-on-year, so they could maintain control of the target until going forward with a listing.
Today entrepreneurs are less confident. He observed that the owners are having self-doubts, and are actively seeking help from experienced private equity that adds value – not only for bolstering corporate governance, but also improving the value proposition of the company’s product.
See also
China private equity enters new phase
HK IPO marks China take-private first
APAC acquisition financing: the alternative funding sources explained
PULL QUOTE: Owners are having self-doubts, and are actively seeking help from experienced private equity