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The world’s largest private equity groups have increased their China-based portfolios this year as the Chinese government’s crackdown on initial public offerings (IPOs) and economic slowdown have left foreign investors’ money locked up in the country. It is no longer possible to sell or list companies.
None of the world’s 10 largest private equity groups operating in China have listed any Chinese company this year or sold their entire stake through an M&A transaction, according to Dealogic statistics.
The pace of withdrawals has slowed since the Chinese government introduced limits on the ability of Chinese companies to go public in 2021, the first such situation in at least a decade.
Acquisition groups rely on being able to sell or take companies public, usually within three to five years of acquisition, to benefit the pension funds, insurance companies and other companies that manage the funds.
The difficulty of doing so effectively locks up these investors’ money and leaves future returns uncertain.
Brock Silvers, CEO of Hong Kong private equity group Kaiyuan Capital, said: “There is a growing awareness among PE investors that China may not be as systemically investable as once thought.” is increasing,” he said.
He said companies in China are facing “weakening exit strategies on a number of fronts,” including the impact of the economic slowdown and domestic regulatory pressures.
Many private equity groups have expanded their presence in the world’s second-largest economy, which has grown rapidly over the past two decades. Pension funds from around the world poured money into the country, hoping to capitalize on the economic boom.
According to Dealogic data, the 10 companies invested $137 billion over the past decade, but their total exits were only $38 billion. New investments by these groups have fallen to just $5 billion since the start of 2022.
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The pace at which buyout groups are exiting deals globally is also slowing. It fell 26% in the first half of this year, according to a report from S&P Global.
But China’s suspension of withdrawal is particularly notable. That has made some pension funds that allocate cash to private equity groups wary of the risk to the country.
“Theoretically, you can buy cheaply now (in China), but you need to think about what happens if you can’t exit or have to hold for longer,” said a private company at a major pension fund. market experts said. We are not currently investing in that country.
“We don’t expect many exits” in China for at least the next few years, said an executive at a major investment group that puts money into private equity funds.
This data includes the largest buyout groups with funds raised for private equity over the past decade: Blackstone, KKR, CVC, TPG, Warburg Pincus, Carlyle Group, Bain Capital, EQT, Advent. – Covers International and Apollo (excluding non-trading groups). In China. This data does not include Blackstone real estate transactions.
Private equity firms sometimes buy and sell companies without disclosing them, and such exits may be missing from the data. Both companies declined to comment.
In addition to the US-China tensions and economic slowdown, difficulties in raising funds are among the main factors preventing international buyout groups from investing in the country.
Jean Salata, founder of Barings Private Equity Asia, which Stockholm-based EQT acquired in 2022, told the Financial Times in June that one of the reasons why doing a deal with China was “high hurdles” One reason is that investors have questions such as: Will I have liquidity for that investment five years from now?”
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Foreign buyout groups used to rely on listing Chinese companies in the U.S. and other countries in order to exit the investment after a few years. However, since cracking down on ride-hailing app DiDi following its 2021 New York IPO, the Chinese government has introduced new restrictions on offshore listings, and listings have slowed significantly since then.
This year’s total IPO value in China was just $7 billion as of the end of November, compared to $46 billion last year, already the lowest total since 2019.
The crackdown has led buyout groups to explore other options, including selling their holdings to domestic companies, multinationals and other buyout groups. But foreign buyers may be reluctant, in part because of increased U.S. political scrutiny on the mainland.
One of the few recent exits among the 10 companies was when Carlyle sold a minority stake in McDonald’s China operations to the U.S. fast-food retailer last year.
During China’s economic boom years before the COVID-19 pandemic, there were dozens of exits, both through listings and mergers and acquisitions, and the role of foreign private equity in driving mainland activity. played a much larger role.
Goldman Sachs CEO David Solomon said at a conference in Hong Kong in November that one reason investors are “mainly sitting on the sidelines” when it comes to deploying money to China is because “it’s very difficult.” He said that it was. . . This is to extract capital. ”
