For Chinese companies in need of financing, private equity funds are an important channel. However, the investment activity in China’s private equity market has dropped to a ten-year low. Major global private equity firms like Blackstone, KKR, and Carlyle have suspended their transactions in China this year.
According to the Financial Times, only five new investments have been made by the top 10 global acquirers in the Chinese market this year, and most of them are relatively small in scale.
Among these five investments, one was made by Blackstone, which proposed a small transaction to increase its stake in its warehouse investment portfolio. Blackstone is a prominent private equity firm in China, and its founder and CEO, Stephen Schwarzman, is one of the most well-known foreign dealmakers in China. However, Blackstone has not engaged in any private equity transactions in China since 2021.
Apart from Blackstone, only Advent and Bain have completed transactions in China this year. Advent made two investments in VNU Exhibitions Asia in Shanghai and Seek Pet Food, a pet food manufacturer in China.
Bain made two transactions through its holding in the packaging group Fedrigoni, acquiring the owners of the Quzhou paper mill, Arjowiggins, and the stake in RFID company BoingTech.
Data from Dealogic shows that out of the 10 companies mentioned earlier, seven of them have had no new investments this year. Just three years ago (2021), these companies made 30 investments in China, but the number of investments has been decreasing annually since then.
Warburg Pincus, once one of the most active American private equity firms in China, completed 18 transactions in 2017 and 15 in 2018. However, in the past two years, their transactions have dropped to two per year, with no deals completed so far this year.
These statistics also include real estate transactions. Nevertheless, private equity firms do not always disclose their transactions, and undisclosed investments may not be included in the statistics.
Kher Sheng Lee, co-head of Alternative Investment Management Association Asia-Pacific, commented, “For investors, China is like a roller coaster ride, with geopolitical tensions, unpredictable regulations, and economic headwinds.”
Over the past decade, private equity firms rushed into the Chinese market to acquire stakes in Chinese companies that could potentially go public in the United States. Now, they are actively trying to divest these once promising investment projects.
As the Chinese economy slows down, investors are less optimistic about the prospects and profitability of innovative Chinese startups going public, and they are no longer willing to take risks for these companies. Furthermore, the Chinese authorities’ crackdown on overseas listings of Chinese companies has reduced avenues for private equity firms to cash out.
On April 24, the Private Equity Fund Industry Network disclosed Bain’s report “The Shift Adjustment Period of the Chinese Private Equity Market in 2024.”
The report reveals that in 2023, the investment activity in the Chinese private equity market hit a ten-year low. Data shows that the transaction volume in 2023 decreased by 58% compared to the five-year average from 2018 to 2022, dropping to $41 billion, with a 31% decrease in the number of transactions. Growth investments continue to dominate the private equity investment market, accounting for 60% of the total transaction amount.
Bain’s research indicates that fundraising challenges in 2024 are still significant. In 2023, the USD fundraising amount focused on the Chinese market dropped by 44% year-on-year. One of the main reasons is that limited partners (LPs) have tightened their purse strings due to economic uncertainty, diverting fund allocations to other regions.
In November 2023, sources revealed to Bloomberg that prominent private equity firms Carlyle Group and Trustar Capital have been seeking partial exits from their investments in McDonald’s businesses in Hong Kong and mainland China.
Niklas Amundsson, partner at global private equity placement agency Monument Group, stated, “China has fallen out of favor completely, with global investors temporarily shunning China.”
According to the latest statistics from the China Securities Investment Fund Industry Association, as of June 2024, there were 20,768 private fund managers, managing funds worth ¥19.89 trillion, a decrease of ¥44.03 billion from the previous month, marking the third consecutive month below the ¥20 trillion mark.
As of the end of June 2024, the number of private equity and venture capital fund managers has decreased from a peak of about 15,000 to around 12,000, managing a total scale of approximately ¥14.2 trillion.
Meanwhile, the United States has further restricted investment in China. On August 9 last year, the White House issued an executive order prohibiting U.S. private equity and venture capital firms from investing in Chinese high-tech companies in semiconductor, microelectronics, quantum information technology, and certain artificial intelligence systems.
Reuters reported that on November 9, 2023, two U.S. senators proposed a bipartisan bill requiring private equity firms to disclose their assets invested in China, Iran, Russia, and North Korea to the U.S. Securities and Exchange Commission (SEC) every year and then publicly report based on this information. Democratic Senator Bob Casey stated, “It is time to stop funneling dollars to these concerning countries.”
Han Lin, China Regional Director of a consulting firm’s Asia Group, told the Financial Times, “While China offers numerous opportunities, geopolitical restrictions such as foreign investment rules make China appear increasingly risky as an investment market.”