Sweden’s private equity firm EQT’s Asia business chairman has remarked that the investment threshold in China is “very high,” with more transaction opportunities in India and Japan by comparison.
According to a report by the Financial Times on June 4th, Jean Salata, the founder of Barings Private Equity Asia (BPEA), now under EQT after being acquired in 2022, emphasized the importance of considering the ease of selling or taking public these companies when contemplating transactions in mainland China.
Salata expressed his views on the difficulty of liquidity for new investments in China, questioning the ease of liquidity for investments made today in the country five years down the line. While the valuation decline has made the Chinese market more intriguing, Salata noted that his company has found more investment opportunities in markets like India, Japan, and Australia, where the concentration of transactions is higher.
Amidst China’s economic slowdown, escalating geopolitical tensions, and Beijing’s tightened regulations on overseas listings, private capital groups focusing on Asia are steering away from China to explore other markets. Particularly, American investors have shifted from compulsory allocations in the Chinese market to investing cautiously.
Data from Dealogic shows that last year, China’s foreign direct investment hit its lowest level since the 1990s, with private equity transactions plummeting from a high of $47.6 billion in 2021 to $4.5 billion in the following year. Following regulatory crackdowns in 2021, overseas listings of Chinese companies dropped significantly. In 2023, the Chinese government introduced regulations requiring regulatory approval for Chinese companies before listing overseas.
A February 2024 report by Caixin revealed that in the first three quarters of 2023, only 57 new foreign currency funds were established, marking a 45.2% year-on-year decrease, with fundraising totaling $91.8 billion, a 59% drop from the same period in 2022. According to data from private equity research firm Zero2IPO, in the first nine months of 2023, PE funds in China executed 6,510 investments, a 25.9% decrease compared to the same period in 2022, with the value of these investments dropping by 31.8%.
EQT manages €40 billion in assets for its private equity business in Asia. At an investor conference in March 2024, it was disclosed that 9% of the company’s investments are in China. EQT’s transactions in China include acquiring a minority stake in JD.com’s healthcare division back in 2019.
Salata noted that his company has been investing in India since 1997, expressing unprecedented optimism and confidence in India’s prospects today. Factors such as India’s young population, growing middle class, and expanding infrastructure contribute to the attractiveness of investments in the country. Nearly 40% of the funds invested by EQT Private Capital Asia are in India.
Comparing India’s current situation to China’s golden decade between 2005 and 2015, Salata highlighted the resemblance, stating that he feels India is currently in a similar phase of growth and opportunity.
The once-booming sector of China’s mobile internet industry, known for its attractiveness to private equity investments, has lost its appeal. Over the past three years, investors have perceived the high-growth, high-return phase of China’s internet industry to have ended.
Meanwhile, no new industry has emerged as a magnet for capital. As private equity retreats, Chinese state-owned enterprises and local governments have become the major players in venture capital investment in China. However, state-owned enterprises usually have longer investment decision cycles and adopt a more cautious approach towards investing in early-stage startups. State-backed investments have surged into industries like new energy and semiconductors that receive government support, causing rapid overcapacity.
An Asian executive of a European private equity firm revealed in February that European private equity funds now require new investments to include clauses for foreign exits, such as exit agreements through buybacks.
“How can we convince the investment committee that we can exit investments in China five years later? That’s the question,” he said.