Ten of the world’s top global private equity funds are trapped in China, struggling to exit. The Chinese companies invested in by these largest private equity groups in the world have set a record this year with zero sales or IPO transactions, marking the first time in a decade such a scenario has occurred.
It has been found that with the backdrop of the Chinese government’s crackdown on initial public offerings (IPOs) and the slowing Chinese economy, their investments have been trapped in China for years, making it difficult to exit.
According to a report by the Financial Times on Tuesday, December 24th, based on data from Dealogic, none of the top ten global private equity investment firms operating in China had any of their invested Chinese companies go public this year, or completely sold their equity through merger deals.
This is a result of the further slowdown in the pace of private equity firms exiting China since the implementation of new regulations for corporate listings in Beijing in 2021. This year marks the first time in a decade that a “zero exit” situation has arisen.
For private equity firms, they rely on selling company shares or helping companies go public to earn returns, in order to provide dividends to their pension funds, insurance companies, and other institutions providing funding. Typically, these exit operations are completed within three to five years after acquiring a company. If they struggle to sell or list the invested companies, it effectively means that the funds of these investment institutions are locked, with future returns also facing uncertainty.
Brock Silvers, Chief Investment Officer of Kaiyuan Capital, a Hong Kong private equity investment group, stated, “There is an increasing sense within the private equity circle that China may no longer be seen as a market with systematic investment potential as it was in the past.”
Silvers pointed out that the exit of private equity firms in China is facing multiple headwinds, including the impact of economic slowdown and domestic regulatory pressures.
According to Dealogic’s data, the total investment of the top ten private equity investment companies in China over the past decade reached $137 billion, but the total exit amount was only $38 billion. Since the beginning of 2022, the new investments of these companies in China have dropped to $5 billion.
Globally, the pace of acquisitions groups exiting investments is also slowing down, but the contraction is not as pronounced as in China. According to a report from S&P Global, the total global exit amount decreased by 26% in the first half of this year.
In China, however, the pace of investment exits has directly stalled. The Financial Times pointed out that this has led some pension funds that allocate funds to private equity firms to hold a more cautious attitude toward the Chinese market.
A private market expert from a large pension fund told the Financial Times, “Theoretically, you can now buy in China at a lower price, but it needs to be clear what will happen if you cannot exit or have to hold for longer.” It is reported that the pension fund is currently not investing in China.
The top ten private equity firms investing in China are Blackstone, KKR, CVC, TPG, Warburg Pincus, Carlyle Group, Bain Capital, EQT, Advent International, and Apollo.
Although private equity firms sometimes engage in undisclosed business transactions, the above data may have omissions. However, the aforementioned companies have not commented on the Financial Times’ report.
In addition to the difficulty in cashing out investments, it is even more challenging to transfer funds out of China.
David Solomon, CEO of Goldman Sachs, stated at a meeting in Hong Kong in November that investors are mainly taking a wait-and-see approach when deploying funds in China, with one of the main reasons being the difficulty of transferring money out of China over the past five years.
“I think it’s very important to attract capital and to allow it to flow in and out smoothly for global investors,” he said.
Jeffrey Perlman, CEO of Warburg Pincus, also mentioned at the same meeting that after the company exited its investment last year, it was very difficult to withdraw $1 billion from China.
“This is very, very challenging,” he said.