Two weeks ago, Deloitte held a webcast session on private equity investment in China. From 2005 through last week, the U.S. market has witnessed 1,287 leveraged buyouts, with a total value of $787 billion, according the the New York Times. China, as the fourth largest economy in the world, had only $13 billion private equity investment following into the country (including all M&A and buyouts) in 2006.
This comes with obvious reasons. The financial landscape of the two countries is incomparable. China still has a large number of state-owned enterprises which counts for close to half of its economy, most private companies have a relatively short history, and many people are unfamiliar with private equity or are simply against selling.
But witnessing what private equity can accomplish, China decided that it needs to join the game. Similar to the media industry where China went through commercialization and digitalization at the same time, China is setting up its own hedge funds and private equity funds when its financial market is only a couple of decades old.
International private equity funds have been active in China for some years, despite great difficulties in making deals, especially buyout deals, in the country. The change came on Dec 30 last year, when China established its first domestic yuan-denominated private equity fund, Bohai Industry Investment Fund in Tianjin. The fund is heavily backed by government and is experiencing conflicts between investors and management, which is government appointed.
With the Partnership Enterprise Law came into effect on June 1 this year, Chinese people can theoretically set up a private equity fund, raise capital and make investment. But in reality, the government is cautious about this new practice and all private equity funds are required to get government approval.
Fang Fenglei, the head of Goldman Sachs Gao Hua securities, is planning to establish his own private equity fund and is trying to get government approval. The vice-minister of the Ministry of Commerce recently said that foreign capital mergers and acquisitions of Chinese companies are the preferred investment method than traditional investment of building factories. The government is counting on private equity, among others, to help China upgrade its industries and move up the value chain.
China has the capacity to "let a hundred 'private equity fund' bloom." There are many Chinese people who already worked in the finance sector in the U.S. for many years. They could fill in the talent vacuum. Getting investors to invest is a little difficult. A former venture capitalist who's establishing his own private equity fund in China says that Chinese investors' knowledge of private equity is zero. Negotiation usually starts with business 101. But it shouldn't take long to educate them. The economic environment is friendly: private sector is surging, there is excess liquidity, and the stock market is strong.
So, expect China's local private equity troops to join the hunt for target companies.
