Private Equity in China

A Comprehensive Overview

Ameya PatkarAhmed TariqPiedong Qui

Syed Ibaduddin Hyder

ContentsIntroduction.................................................................................................................................................2

Deal Origination...........................................................................................................................................2

Private Equity Structure and Rising Competition.........................................................................................3

Tight Regulatory Implications and Way Forward.........................................................................................4

Opportunities & Challenges.........................................................................................................................5

Opportunities..........................................................................................................................................6

Challenges...............................................................................................................................................8

Attractive Investment Sectors...................................................................................................................10

The VIE Structure.......................................................................................................................................10

Recent Issues of VIE...................................................................................................................................11

Future of VIE and China PE........................................................................................................................12

SETTING PRECEDENCE FOR THE FUTURE OF PRIVATE EQUITY..................................................................13

TRENDS......................................................................................................................................................14

REFLECTIONS: GOING FORWARD..............................................................................................................16

BIBLIOGRAPHY:..........................................................................................................................................18

IntroductionChina’s accelerated economic growth in the past decade has led to unprecedented expansion in bank

lending and bond issuances. However, these sources of financing have not fully bridged the financing gap

faced by Chinese companies, therefore private equity played the role as an additional source of capital for

China’s corporate sector. Also, investors with surplus capital have viewed private equity as another asset

class and have taken private equity exposure in an emerging market like China for diversification

purposes (Alexander & Casey, 2012).

The PE firms are driven by China’s positive IPO environment and high exit multiple valuations giving a

potential exit plan for their private equity investments. Other exit strategies like private sale have also

been faring well but IPOs have been more dominant in China.

This report intends to portray a holistic view of the private equity space in China deal origination,

structuring, investing and divestment in China. It then discusses the various opportunities and

challenges and attractive investment sectors. Moreover, it sheds light on how wills government

interpretation and public discussions on VIE (Variable Interest Entities) change the fundamental aspects

of the industry and finally dwells upon the future of China’s private equity market? Trends and

prospects

Deal OriginationPotential deals in China are a lot to begin with however there are enormous challenges in the Chinese

private equity market. According to John Zhao (CEO of Hony Capital), structurally speaking many small

and mid-sized companies in China lack good management, proper accounting procedures and maintain

multiple sets of books, which makes due diligence procedures lengthy and difficult for PE firms

(Economist, 2012). Essentially with so much competition in the market from other PE firms, closing the

deal sooner is a priority for PE firms especially when a lot of capital from domestic and foreign investors

is chasing deals in China. Apart from this constraint, the quality of management conflicts with the aims

and objectives of PE firms in China creating agency problems for PE firms.

PE market in China has witnessed a drop in fundraising and investment activity in 2012 as per needs and

opportunities arising in the Chinese economy (Lee, 2012). This may sound alarm bells for various PE

firms already invested into Chinese companies because lower capital and deal flows may shake their

confidence in staying invested and may launch clauses to exit their investments. Even though China’s

growth is forecasted to be slower than before in 2013, its GDP will still be growing at six to seven percent

which is sufficient to sustain the level of opportunities for PE firms as investment grade companies

provide at least double the growth rate and healthy returns (Lee, 2012).

Private Equity Structure and Rising CompetitionAllen Lee (2012) has categorized PE funds in China into four groups:

1. Affiliated funds: captive or third party funds managed by affiliates of institutions

2. “Princeling funds”: known for links to prominent and influential Communist officials with vast

network access and strong political clout

3. Independent funds: with no corporate or political affiliation

4. Foreign Funds: US-dollar denominated funds headquartered outside of mainland China

This categorization carries importance because in China affiliation with different centers of power is

important as it speeds up approval & execution of transactions by the government. Therefore existing

foreign PE firms mostly endeavor to set up PE funds in partnership with local groups or firms in China

(including state-owned enterprises or firms with connections).

As opposed to spending time and money for due diligence, local PE firms rely increasingly on their

network of contacts to form opinions and make decisions faster based on gut instincts in executing deals

as compared to foreign PE firms, which further increases competition for foreign firms (Cheng, 2011).

It is important to notice the extraordinary government support provided to growth of domestic PE firms

so that all funds raised, invested and exited remain within China. Part of the reason why competition has

increased is also because of the high number of domestic PE firms entering the industry where the

government has allowed them to raise yuan-denominated funds and to convert corporate investment

houses to limited partnerships so they’re able to raise funds from wealthy Chinese individuals. On the

other hand, the government has made it more difficult for foreign PE firms to invest dollar-denominated

funds from offshore holding entities. (Gordon, 2013)

This channel has clearly helped to make fund-raising even easier and more flexible for domestic PE firms.

This way an advantage is given to domestic firms, which are already well rooted in the system and have

the ability to quickly source and sign deals. (Gordon, 2013)

Tight Regulatory Implications and Way ForwardCompetition in the PE industry is certainly healthy and shall go a long way to create a diverse set of firms

to contribute to the long-term growth of companies in China. However, the tilt towards domestic firms

clearly shows on how China still wants RMB funds to stay within China and restrict major portion of PE

business with local limited partners.

Such an environment may restrict the truer form of competition, as lesser PE firms from the rest of the

world would want to set-up shop in China. But in the future it may be expected that with

internationalization of the renminbi, China would be more open in inviting PE firms from around the

world, including offshore holding entities, to invest in China.

Relatively larger PE firms, like Blackstone, KKR, TPG and Carlyle Group still find their way through

partnerships with local firms or business groups. Also, their scale and level of experience in private equity

is unmatchable. Another competitive advantage held by foreign firms is the access to cheap capital due to

low interest rates prevailing in their markets as opposed to higher rates in China (Gordon, 2013). This

way through borrowing opportunities they are able to get hold of bigger deals, a space where not many

PE firms venture in. This not only helps them to invest but create effective channels to exit their

investments as well. In the partnership they may be able to sell their stake to the partner and exit the

market, whereas on a standalone basis there are numerous regulatory issues that arise for foreign PE

firms. To circumvent regulatory issues, the PE firms have teamed up with local governments in China to

raise yuan-denominated funds and invest in local companies (Gordon, 2013). This shows that despite

barriers raised by the Chinese government, foreign PE firms are still interested in coming to China and

have found different ways to counter disadvantageous measures taken by the government of China. The

deal potential in China is still big enough to attract foreign PE firms and it is estimated by Bain Capital

that the private equity industry in China still has $43 billion of deal potential to harness.

Opportunities & ChallengesThe Chinese economy has witnessed one of the sharpest growth rates and has been one of the main

drivers of growth for the global economy. The country of 1.34 billion people has a Gross National Income

of $4,940 which has been consistently rising since 1993.

19931995

19971999

20012003

20052007

20092011

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

GNI per capita (current US$)

GNI per capita (current US$)

Source: World Bank Data

As millions of people join the rank of middle income category they demand varied goods and services

(Bunder, 2013); considering the significant size of the country’s population this presents a huge

opportunity for companies to expand. Consequently this translates into opportunity for private equity

firms that not only fill the funding gap for many of the businesses, which grew from “mom and pop

shops” to size businesses, but also provide them with better managerial talent and expertise (Deng, 2013).

While the huge market potential provides opportunities for private equity firms in China, however at the

same time numerous other factors present challenges for these firms.

OpportunitiesThe Chinese economy for the better part of its history has relied primarily upon its export as a driver for

GDP growth; however the downturn in Europe and USA has had an impact on its export and China is

now transitioning to a demand driven economy (Bunder, 2013). Nonetheless it should not be expected

that the transition from an export led economy to a consumer driven economy would be a smooth one,

especially owing to the uncertainty that surrounds the global economy, the following graph shows the

annual GDP growth rate for China (Bunder, 2013).

The volatility in China’s economy has resulted in reducing the public market valuations, the price to

earnings ratios have declined from 17 time forward EBITDA in early part of 2011 to 12.6 times forward

EBITDA by the end of 2012 (Bunder, 2013). This works like a double edged sword for private equity

firms; while on one hand it results in lower exit multiples for firms, but at the same time it also lowers the

value of target firms at this point in time and therefore provides the opportunity to earn higher multiples

from these in the future.

The following graph shows the decline in forward price to earnings ratio for Shanghai A shares in 2011

and 2012 (Bunder, 2013):

Another byproduct of the declining stock market multiples is the pressure on stock prices of listed

companies which find it better to take their company private. Furthermore, falling multiples is not only a

feature that is common to Chinese stock exchange only but also to other stock exchanges as well. One

such example is that of Focus Media that was taken private for $3.7 billion. The company which is based

out of Shanghai was listed on the Nasdaq in 2005 at an average multiple of 35 times forward earnings,

however by 2012 the stock had come under pressure and the company’s forward multiple had gone down

to 8.3 which seemed attractive to the consortium of The Carlyle Group, CITIC Capital Partners,

Fountainvest Partners and China Everbright to bid for the company (Bunder, 2013).

Distressed assets also provide an opportunity for private equity funds to enter the Chinese markets; the

Private Equity round up for China by Ernst & Young states that a significant number of financing for

firms in China comes in the form of bank loans and some of these would turn into non-performing loans.

This presents an opportunity for private equity funds that have the risk appetite to invest in these

distressed firms and turn them around. Reportedly two funds to the tune of $4.6 billion were raised in

2012 to finance distressed assets (Bunder, 2013).

Moreover, some regulatory forces have also worked in favor of private equity firms in China. One such

example is that of China Insurance Regulatory Commission (CIRC) which in 2010 allowed Chinese

insurance companies to invest up to 5% of their assets in domestic PE firms which unlocked insurance

industry’s pool of an estimated value of $ 1 trillion. This regulation was further relaxed by the CIRC in

July 2012 and allowed insurance companies to enhance their investment in PE firms up to 10% of their

assets and in October 2012 this the CIRC issued regulations which allowed insurance companies to invest

in foreign PE funds as well (Bunder, 2013). As a result the National Social Security Fund (NSSF)

announced that it would enhance its investment in PE funds by more than 50% from $3.1 billion to $4.8

billion by the end of 2012 and as of September NSSF’s investment in PE funds had risen to $3.7 billion.

Challenges The Private Equity industry in China faces a number of challenges. The biggest and immediate challenge

that PE firms face is their ability to exit via IPOs. The China Securities Regulatory Commission (CSRC)

stopped the process of approving listing of companies in October 2012 in a bid to reform and stabilize the

domestic market. According to estimates there are more than 7,500 unexited private equity investments in

China from deals executed since 2000 (Rabinovitch, 2013). While delay in exit is one obvious

consequence of the halt on approval process, this has already created significant problems for PE firms

that were solely focused on taking advantage of the arbitrage between the private and public valuations

and therefore operated on the business model of investing in companies and then taking them public in a

short time to unlock huge returns. One such example is that of Kunwu Jiuding Capital that looked for

companies that were most suited for an immediate IPO. This model allowed Jiuding to earn returns up to

600% at times and made it into one of the largest PE firms in China with a capital of over $1 billion.

Considering the short time it took to make exits, Juiding promised investor to return their capital within

four to six years which is half the time promised by firms such as Carlyle or Blackstone. However, the

recent block on the approval process puts a significant pressure on PE fims like Jiuding Capital (Fuhrman,

2013).

Another side effect of the break in the IPO process is the fact that it makes it difficult for PE firms to raise

funds, especially mid-tier funds that find it difficult to convince limited partners to put up money ("China

pe industry," 2013).

PE firms in China face another challenge, which might be minor in comparison to the other obstacle is

that going public is considered more prestigious than being bought by PE firms (Deng, 2013).

Regulatory oversight is another development that the private equity industry in China faces. The CSRC

has issued draft revisions to China’s Securities Investments and Funds Law which would treat PE funds

as securities and would require more disclosure from PE firms (Bunder, 2013).

Moreover, the regulatory environment makes it difficult for foreign private equity firms as well,

especially in terms of repatriation of fund from China. Exit proceeds are subject to review by State

Administration of Foreign Exchange (SAFE) and the proceeds should equal the “reasonably expected

returns from a legitimate transaction in China” (Deng, 2013). Furthermore, the dividends or exit proceeds

should be repatriated in a timely manner or risk being viewed as “disguised foreign loans”. Judy Deng in

her journal article published in the Journal of Private Equity in summer 2013 states the following:

“According to China’s foreign currency regulations, a foreign loan—that is, a loan extended by a

non-Chinese party to a Chinese party—must be registered with SAFE as a capital account item.

A disguised foreign loan is a loan extended directly or indirectly by a non-Chinese party that is

not registered with SAFE. It is anticipated that “disguised foreign loans” could attract more

scrutiny in the future when the pressure on renminbi’s appreciation is more significant. By the

same token, if the exit proceeds are “recycled” for reinvestment in a Chinese entity and if such

reinvestment is completed without the approval of MOFCOM, the relevant Chinese tax

authorities could challenge the transaction on the same grounds.”

Apart from the regulatory oversight, Darek Klonowski in his article, Private equity in emerging markets:

The new frontiers of international finance, noted that private equity firms are often subject to politically

driven process and that experts believe that the recent political change might be less open to foreign

investment (KLONOWSKI, 2013).

Attractive Investment SectorsIn its report titled “Asia Pacific Private Equity Outlook 2013”, Ernst & Young surveyed 50 private equity

general partners, 30 institutional investors (LPs) and 20 private equity investment bankers on their

outlook for private equity in 2013. The respondents to the survey believed that “Energy, mining and

utilities”, “Consumer” and “Technology media and telecommunications” will witness the greatest amount

of private equity activity in the coming year. This is not surprising considering the burgeoning middle

class in China which has more discretionary income and therefore would have a significant demand for

the services provided by the three sectors identified above (Buxton, 2013).

This is further supported by the fact that Hony Capital recently established a fund to the tune of 3 billion

yuan ($489 million) with Shanghai Media Group to invest in production of film and television series,

which is expected considering that revenues from the media and culture industry are expected to reach 3.2

trillion yuan (5% of GDP) by 2015 (Cheung, 2013). Similarly National Film Capital has raised a 1.5

billion yuan fund to build movie theaters across the mainland (Cheung, 2013).

Another testament to the focus on telecommunications industry is CVC Capital Partner’s investment in

Hong Kong Broadband Network which provides high speed broadband and other telephony services to

more than two million customers (Bunder, 2013).

The VIE StructureVIE (Variable Interest Entities) has been well known in China PE markets since Sina was listed in

NASDAQ in 2000 which is also known as the “Sina-Model”. It belongs to offshore listing, one of the two

models for Chinese companies going for IPO (Initial public offering). The other one is onshore listing

such as A-Share listing. The VIE structure is very common and many Chinese internet companies are

using this structure to be listed on NASDAQ, NYSE or HKSE, which include Sina, Sohu, Baidu, Ctrip,

YouKu, Tencent, Alibaba.com (delisted in 2012) and LightinTheBox (the most recent Chinese company

listed in NASDAQ on 6.Jun.2013) etc.

The following graph shows a typical VIE structure (David, 2011). The offshore holding company holds a

controlling interest over the domestic operating company through a series of “contractual arrangements”

rather than through direct majority equity ownership (Donald, 2011).

The VIE structure helps the foreign investors to deal with Chinese regulatory restrictions on certain

industry sectors such as Internet, telecommunications and media etc. It also helps the foreign investor to

avoid the complicated approval procedure for a foreign direct investment. However owing to the unique

“contractual arrangements”, VIE has always been under the arguments whether it is a “legal” and

“effective” structure to sustain.

Recent Issues of VIEThe VIE structure came under much discussion in 2011 and 2012 after two Chinese companies

encountered the issues related to VIE.

In May.2011, Alipay, an online payment company controlled by Alibaba.com, was transferred to a

domestic Chinese company controlled by Jack Ma without the approval of Alibaba’s board, which

included one board of director from Yahoo. The reason of the transferring ownership was because the

People’s Bank of China “allegedly” wouldn’t grant the online payment permit to “online payment

companies that have foreign ownership, whether directly through equity interests or indirectly through the

use of the VIE structure” (Brain, 2011). Although Yahoo and Alibaba settled this issue by signing one

agreement that Alipay would pay Alibaba 37.5% of the valuation when Alipay was going IPO, it was still

unclear whether the permit would be granted to Alipay if it hadn’t been transferred out of Alibaba. This

incident shows the risk that Chinese authority still has the possibility to apply the regulation on the VIEs

for the certain purposes and also show that this kind of contractual arrangements have a high risk.

In Jul.2012, New Oriental Education and Technology Group (EDU), one famous Chinese private

education firm, announced to restructure it’s VIE ownership (China.Org.CN, 2012). Chairman Michael

Yu had taken back all the ownership of its VIE from the other 10 original shareholders who had left EDU.

Although Michael Yu claimed the purpose was to help the holding company to have a clearer VIE

structure only, SEC (U.S. Securities and Exchange Commission) still launched the investigation over its

possible accounting irregularities. Although SEC claimed the investigation was towards EDU only not the

whole VIE structure, the public still regarded this incident as the risk of VIE which had an unclear

structure and ownership without the strict accounting regulation in general.

Future of VIE and China PEDespite the hot arguments on VIE, LightInTheBox Holding Co., whose structure is also based on VIE,

went for IPO in NASDAQ on 6.Jun.2013. The fact is that many Chinese companies listed offshore are

still under VIE structure which includes giant companies such as Baidu with US$30B-$40B market

capital. The VIE structure will be most likely continued for several more years until some clearer

structure could take place in the China PE markets.

However both foreign investors and Chinese companies’ founders should be aware of the risks of VIE

structure when they are considering to construct one VIE company.

1. Change in regulation: There is still no real operational regulation from Chinese authority for VIE.

The risk is still remaining that Chinese authority may ban some of the permits from VIE in the future,

which would lead to the similar issue as Alipay’s case.

2. The risk of “contractual arrangements”: Foreign investors have no direct equity ownership of the

Chinese operating company and rely on the contractual arrangements only. It will be difficult for the

investors to correct some management issue if any. There is also lack of complete law to handle such

issues; therefore the rights of the foreign investors are not well protected.

3. There are still other risks such as lack of the complete accounting regulation, the risk of tax and the

foreign exchange control etc.

With all the kinds of existing risks, China PE markets may need to consider the effect of insufficient

funds raised from the VIE structure in the future. One recommendation is to further formalize the VIE

structure by clearly defining the regulations to reduce the uncertainty. The other possibility is to develop

the local PEs. By providing the training and practicing grounds and also providing the certain policy

support, it will help to grow the local PEs faster.

SETTING PRECEDENCE FOR THE FUTURE OF PRIVATE EQUITY Since 2010, there were whispers over valuations, shortened initial public offering (IPO) durations, and a

growing number of private equity applications, pending approvals and IPO’s. In addition to the enigma

that accompanied private equity (PE) deals, China Security Securities Regulatory Commission (CSRC)

had also started looking into suspicious dealings pertaining to preeminent companies like Kunwu Jiuding

Capital. The company’s PE developing style was developed to perfectly adapt to the Chinese business

environment. It did not look to assess its peers, industry, or strategic advantages. In fact, it only was on

the look out for deals where it could essentially make a quick buck – basically seek out companies that

met requirements for an immediate domestic IPO. Most of the deals Kunwu Jiuding Capital undertook,

took advantage of arbitrage opportunities with respect to large valuation differentials between private

equity entry multiples and expected IPO exit valuations. In fact so blatant were the company’s executives

that their pre-investment work consisted mainly of simulating the IPO approval process of the CSRC. If

these simulations implied a quick speedy CSRC IPO approval, the company was given access to Kunwu

Jiuding capital. The final objective – cash out in less than two years.

Clearer most shocking was the lack of direction and ignoring of private equity fundamentals and

valuations. And strangest of all – it actually worked for several years. The company made a large number

of these deals on such investment philosophy and in many instances cashed in returns in excess of 600%.

Realizing the potential goldmine they were sitting on, they went on with this farcical act and ironically

became one of China’s largest PE firms with over $1 billion in capital. (Fuhrman, 2013)

Since mid-2011, CSRC decided to investigate into the activities of PE firms in China. Intent on cleaning

up the act, CSRC authorities wanted to magnify the issue that PE companies could not predict, anticipate

or hedge against the IPO process. With no clear indication of what it had planned, CSRC first slowed

down the number of IPO approvals and on October 2012, halted IPO’s altogether. This seriously affected

the private equity industry in China and put a dent in the previous trend of Chinese private equity firms

raising money and promising its RMB investors a return on capital within four to six years. In many

positive ways, this reflected on the belief that CSRC authorities were intent on showing that undertaking

an IPO should was a function of valuations, political and institutional policies and that these could not be

predicted.

TRENDSFor almost a decade, the private equity market in China was as sexy as it could get. In fact according to

statistics by China First Capital, 2001 to 2012 witnessed this market farming almost 10,000 deals at a

combined value close to $230 billion (Gough, 2013). The year 2012 witnessed the Chinese Private Equity

market going through major upheaval. And in 2013, we are now witnessing a decimated market, in which

PE industry in China has lost a significant amount of its steam. Investments flowing in are close to zero

and particularly interesting is the fact that Renminbi fundraising is almost non-existent. On the whole, this

drop has accounted for a 50% year-on-year drop for capital entering China-focused vehicles as a whole.

Sadly, with negligible activity, the only beacon of light in 2012 was the $3.7 billion private equity tranche

that formed part of Alibaba Groups $7.6 billion buyback from Yahoo.

Gone are the days, when select investors were lining up for pre-IPO opportunities. In China, this has

special been extremely lucrative for investors who were simply looking to buy and hold for the

prerequisite average three-year period before finally selling after the lock up period with very comfortable

valuation premiums. With returns around ten times the original investment, it was extremely normal for

investors to even bribe CSRC officials to get the needed approvals. However times have changed

drastically and this is no more the case. 2013 has witnessed CSRC demanding stringent conditions be

filled by all applicants. Furthermore, the CSRC is now requiring underwriters of applicant companies to

reinvestigate the authenticity of the filings. Taking a stand of this magnitude shows how serious the

CSRC is when it comes to building a transparent private equity market in China. And so far this is

beginning to show results - Out of the 600 applicants waiting for approval, 166 companies have already

withdrawn their applications (Zhou, 2013). As it currently stands, thousands of private equity company’s

in China have pending applications at different stages in the process pipeline. And according to recent

estimates, this is a nightmare scenario. Sources say that there are 100 companies that have approval are

waiting to IPO, 600 with submitted applications waiting for approval – pending CSRC investigation,

2,000-3,000 waiting to submit applications and 7,500 that remain un-exited. Sadly, the numbers only

paint half the picture, reality only hits when confronted with the fact that CSRC has never approved more

than 125 IPO’s in any given year (Fuhrman, 2013).

Adding fuel to this fire is a slowing economy that has given rise to a falling investor confidence and both

individual and institutional investors are not keen on purchasing shares from IPO’s. In fact 2013, has

witnessed pre-IPO numbers falling from the lofty ten times average exit returns to currently two to three.

To make matters worse, this lack of confidence in Chinese private equity has made its way to the US

shores and even NASDAQ surprisingly is curtailing its once open door for Chinese companies. Adding to

the NASDAQ woes, are accounting fraud scandals that further elicited a crackdown by the Securities and

Exchange Commission (SEC) - eventually making interest in new Chinese offerings even more

unpalatable. Finally, adding to complexities - the issue of the lack of exit strategies in PE firms in China

have always been a great concern to institutional investors and pension funds in the United States, Europe

and Asia alike.

With CSRC dropping the gauntlet, slowing down economic conditions, stricter laws and checks in place,

the future for private equity in china is currently bleak. In essence, fears over cooked books, valuations

and wrongdoings have made the IPO market a Russian roulette playground. A few analysts have in fact

indirectly blamed the Chinese economy for the crazed demand and over-investing in the pre-IPO period.

REFLECTIONS: GOING FORWARDWith respect to prospects going forward, there seem to be mixed sentiments. Recent forecasts for slower

growth, stricter CSRC regulations and changes in macro conditions all point to uncertainty about future

economic policies and regulations with respect to the Chinese PE market.

However many analysts in China and the west still feel, that Chinese GPs and LPs are optimistic and that

the private equity industry in China will find its way eventually. The shake out should do more good than

bad and the eventual results should fare better for company’s wanting to IPO in the future. Using the

thumb rule - investment grade companies would having growth rates that are twice that of the economy,

indirectly supporting the sentiment of an achievable 12 – 13 % returns in China. The trend gong forward

should be on how LP’s focus on adding value - not simply providing capital, and waiting to simulate IPO

approval processes like in the past. In the future, Chinese companies will need to adapt the quintessential

private equity model, invest for longer horizons and actually valuing a company on medium to long-term

prospects (Lee, 2012). Because of the lack of required due diligence mentioned above, I see the private

equity market crippling over the next few years.

For Chinese private equity market to develop, there has to a drastic change in the thought process of

investors and authorities. In terms of the future, many analysts vision - “Majority buyout” as a developing

trend. Currently, the lack of well established debt markets in China do not support large LBO deals, but

with the current sentiment of IPO’s not picking up in the months ahead – a lack of confidence for the

market with investors not showing any interest in the IPO shares floated, buyouts should start to become

more common in the years ahead.

Direct secondary is another viable option that has gained momentum in the past year or so. Analysts feel

that institutional and dedicated investors are on the look out for financing private equity investments in

the secondary market. And although the market for secondary is still patchy, there are essentially firms

like AXA Private Equity and Neuberger Berman looking to delve into the Chinese market going forward.

Furthermore, global investment banks like Goldman Sachs and JPMorgan Chase, Morgan Stanley and

few institutional investors are said to have an increasing appetite especially within China. An additional

advantage of direct secondary’s is that they complement the structure of private equity by increasing

liquidity within the market (Zhou, 2013).

China’s private equity industry is definite at a turning point, unchartered territory of kinds. With the

established pre-IPO model loosing its footing and regulators taking a firm stand, I see the private equity

market taking time to evolve from this flux.

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