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发帖数: 602 | 1 What is private equity?" was the common question asked in China back in the
1990s.
The terminology was not as widespread as it is today, with only a handful of
private equity firms active in the market. I recall having to conduct a
small
seminar with a company's management team, explaining the virtues of private
equity
before any transaction terms could be discussed. Times have changed since
the
early years as China is now home to over 200 China-dedicated funds raising
over
$15bn (Rmb 103bn, 0.8bn, ￡9.5bn) of fresh capital in 2008.
However, the impact of the global financial crisis has been felt throughout
the
Asian market, and China is no exception. Both H and A share markets saw
significant declines in Q4 2008, dragging company valuations down to all-
time lows
since their IPOs. Investors panicked as they witnessed their portfolios drop
by
50-70% with no signs of stabilisation in the near future. Those hardest hit
were
investors who paid over-inflated prices for their assets and lacked the
managerial
expertise and active involvement to protect their company's bottom lines.
Inevitably, the financial crisis has produced interesting investment
openings. The
lack of an IPO market, as well as significant valuation corrections, are
providing
new opportunities for potential investors. Asset prices have come down to
more
reasonable levels and company founders are now more receptive to greater
participation from investors. Positive government support and a growing
acceptance
of private equity in China are paving the way for a rebirth in the asset
class.
Growth capital investments continue to dominate the field as sellers still
struggle with relinquishing majority control of their companies. In 2008, 85
% of
private equity transactions in China were categorised as growth/expansion
investments, compared with only 12% reported as buyouts. 'Control' deals
accounted
for only 17% of the transactions in 2008, still proving the difficulty in
accessing such investments. However, for operationally-focused investors who
offer
more than just financial backing, the emergence of buyout/control
opportunities is
gaining more ground.
The increasing trend towards buyout/control situations can be found in a
number of
areas. Chinese state-owned enterprises (SOEs) and privately-controlled
conglomerates have over-diversified their businesses in the past 20 years
and are
now refocusing their cash reserves and efforts to revitalise their core
competencies. The spin-off of non-core assets has traditionally been a prime
target of private equity firms and it is no different in China today. Many
of
China's first-generation entrepreneurs are facing their own challenges, such
as
succession problems or a desire to cash out. Finally, many of the small and
medium-sized enterprises (SMEs) are hitting growth bottlenecks due to a lack
of
systems and management expertise. SMEs find it difficult to attract local
management professionals away from their higher-paying and more prestigious
positions at multinational corporations.
Leverage financing was never a factor in onshore transactions due to its
lack of
availability for the past 14 years and the government's control over bank
lending.
To further bolster China's buyout market, Chinese banks are now allowed to
lend
acquisition financing under new government legislation, albeit limited to 50
% of
the deal size. Local banks have initiated their acquisition financing
business by
providing lending to SOE-backed transactions, attracted to the security of
these
businesses. Support for the private sector does not seem too far behind as
both
local banks and government policies move toward further stimulating the
economy.
Although China's economic boom elevated the country's consumer market to new
heights of organisation and improvement, certain categories still remain
highly
fragmented compared with developed markets. Regional dominance is prevalent
throughout China's retailing and service sectors, with only a handful of
nationally recognised brands. Organised retailers, such as in the home
improvement
retailing business, only have a 5% market share. Similarly, no single mobile
phone
retailer commands a double-digit market share in China's 650m user market.
Opportunities to form 'true' leaders will open the doors to consolidation,
further
strengthening the necessity and viability of private equity fund managers
who have
demonstrated their competence in integration and operation.
The main theme in China investment continues to be the pursuit of
penetrating the
country's 1bn consumers. With the $586bn government stimulus package,
announced in
November 2008, to increase infrastructure spending and revamp China's social
welfare, recent investment activity has targeted those companies that would
directly benefit from the potential inflow of capital, such as healthcare,
alternative energy and consumer durables. China's private education sector
is
another industry in the spotlight. The country's for-profit education
expenditure
recorded a CAGR of 34% between 2005 and 2008 and is expected to continue its
upward trajectory as the demand for higher education grows. In China,
education is
the second largest family expenditure at 15%, making the industry recession-
resilient.
At times, the odds may seem heavily stacked against the investor,
persistently
faced with ever-changing government policies, lukewarm perception of private
equity and a rapidly evolving economy. In order to face these challenges,
fund
managers will need not only to show agility in conforming to China's culture
and
policies, but to prove to their critics that operational and investment know
-how
is necessary to further develop China into a leading market.
Personal experience has taught me to rely heavily on in-house capabilities
such as
legal and licensing teams that stay ahead of changing policies and
intelligently
structure deals to minimise risk and potential liabilities. It is even more
important to have dedicated operations and monitoring teams to deliver quick
and
decisive action while fostering a strong 'partnership' approach with local
management teams.
With organisations such as the China Private Equity Association working
closely
with the government to advocate the asset class in China, and with fund
managers
demonstrating their merits of operational improvement and management
expertise, it
will not be a question of whether private equity will succeed in China, but
rather
how soon the asset class will prevail. |
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