Private equity has entered the economic mainstream in China. However, VC is still in the process together with angel investing.
We have all noticed that over the recent years, some of the most famous global private equity companies have increasingly invested in China. Carlyle, Newbridge, Morgan Stanley and Goldman Sachs were followed by new faces including CVC, Affinity, CDH and H&Q.
More recently, local private funds in east China’s Zhejiang and Jiangsu provinces have become extremely active and are now competing with foreign buyers.
Many domestic investors believe domestic private equity funds will understand Chinese companies better than their foreign rivals; and that they will be better prepared to get the deals at a “local price”.
However, domestic private equity funds still need to become more “professionalized”. Sectoral expertise and professional back offices will be very important in the near future.
In this context, JVs between foreign and domestic PE funds will probably be a growing trend in the following years.
This is also related to some concerns expressed in 2006 by the Ministry of Commerce of China regarding the fact that foreign players had acquired or controlled the top companies in 20 out of 28 Chinese industries. The Ministry called this phenomena “decapitation” and went on to debate national economical security concerns and the tightening of China’s cross-border M&A policies.
As a result the New M&A Rules were enacted and have made the regulatory approvals and market entry strategies more cumbersome. It can also be said that these new rules attempt to make the market more transparent especially regarding the “round tripping” of domestic investors.
This being said, there are several areas that are being explicitly promoted by the government, such as those related to High Tech industries. Telecom, renewable energy and clean technologies are the most representative ones. Also R&D centers and new technologies for the food industry are being promoted and receive clear incentives of different types.
Other Relevant Trends
- Adjusting to differing investment return profile/horizon, especially in light of the current financial crisis.
- State-owned companies and administrative bodies are also becoming more interested in foreign private equity investment.
- This trend is partly related to the fact that the government wants to retain control of Chinese household names. The government is now open to these investment because that have understood that private equity companies can help their companies grow and internationalize rapidly while retaining a controlling stake in hand.