Finance

Private equity firms find themselves in trouble in China after $1.5tn investment boom


(Bloomberg) — Private equity firms that have amassed more than $1.5 trillion in assets in China in just 20 years are now trying to sell off once-promising investments where they had counted on rich returns.

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Buyout firms are exploring private sales amid depressed public markets and unattractive valuations. However, according to people familiar with the matter, concerns about investment risks in mainland China are growing. So-called secondary buyers are demanding discounts of 30% to 60% or more to familiarize themselves with the market, and discounts in Europe and the United States are close to 15%.

Many companies are also considering an alternative strategy of setting up so-called continuing investment funds to take over controlling stakes for a few years to reduce sales, according to interviews with more than a dozen private equity investors and advisers. This has also proven challenging.

The lack of easy exits – affecting companies such as Blackstone-backed PAG Group and Carlyle Group – has transformed the world’s second-largest economy from a broad acquisition frontier to an uncertain long-term investment outlook. Concerns about the direction of politics under Xi Jinping have grown over the past few years as the economy has struggled to regain momentum, leading to record outflows from open markets.

Niklas Amundsson, a partner at global private equity agency Monument Group, said: “We are in more challenging times, very similar to the way we experienced the global financial crisis. China has completely fallen out of favor, and global investment Investors will put money into China.” China has put it on hold for now. “

fresh capital

Hong Kong-based PAG, which has $50 billion in assets under management and is focused on Asia, has been trying for months to mount a tender offer for about $1 billion of assets in previous funds, people familiar with the matter include potential buyers and their advisers. said, requesting anonymity discussing confidential talks. A spokesman declined to comment.

Some transactions may go ahead because conditions are right.

According to people familiar with the matter, Carlyle Group and Trustar Capital have been seeking to partially withdraw from their investment in McDonald’s business in Hong Kong and mainland China. The transaction may involve the establishment of a new agency and attract new capital at a cost of US$4 billion. said during the meeting.

The key difference in this case is that the company’s earnings are strong, making a partial private cashout of aging investments more feasible, even if a public offering is unattractive in the current environment. be set to.

Spokespeople for Carlyle and Trustar declined to comment.

Fundraising slump

These are tough times for private equity firms.

After years of growth, some institutional clients, such as the U.S. Pension System, have reached the limit of how much they are willing to allocate to the sector, making it more difficult for small and mid-sized fund managers to raise new capital in the sector. People familiar with the matter said this is an era of rising interest rates. Secondary buyers are finding pricing risk increasingly challenging. Some potential clients also privately have reservations about the quality of some Asian private equity firms and their assets.

Data compiled by Bloomberg show that Chinese deals involving private equity firms are expected to decline for a second consecutive year after plunging 50% last year.

About 151 funds targeting Greater China raised a total of $33.3 billion last year, the industry’s smallest amount since 2013, according to data from Preqin. This year looks even bleaker.

Meanwhile, valuation and exit difficulties have led to an increase in dry powder, which reached $216 billion by the end of 2022. Preqin wrote in a note that fund managers are having a hard time finding projects in China that are “reasonably valued and completed.” and portfolio exits. “

Clients are showing greater interest in financing deals in other parts of the region, such as India, Vietnam, South Korea, Australia and Japan, people familiar with the matter said. The U.S. has surpassed Asia as the top destination for returns.

For funds launching in 2021, the average return on U.S. investments based on portfolio company cash flow was 11.2%, according to a March 31 Cambridge Associates report seen by Bloomberg. By comparison, funds focused primarily on emerging markets returned 6.1%. Asia Pacific.

survivor power

Citadel founder Ken Griffin told a conference in Hong Kong last week that international investors cannot completely ignore opportunities in China. They “must pay attention to China and invest”.

In fact, Hillhouse Capital is looking for opportunities. The Asia-based company became a behemoth decades ago by presciently investing money from Yale University’s endowment in some of China’s largest companies. The company has been gauging international investor interest in a fund expected to be worth billions of dollars to acquire troubled Chinese companies.

Zhang Lei, founder and chairman of the $80 billion investment firm, told a Hong Kong conference: “The best companies are built in the worst, most challenging times. In this period, you will see to the greatest companies being born.” Time. “

Other companies are also taking bets. Blackstone Inc. is considering acquiring Growatt Technology Co., which could value the Chinese solar equipment maker at about $1 billion, people familiar with the matter said in September. Private equity firm acquires Hollysys Automation Technologies Ltd. for $1.6 billion.

But at least in the short term, pessimism continues to seep into the conversation.

Zhang Yishi, chief executive of CITIC Capital Holdings’ private equity arm Cinstar Capital, said last week that it will take time for China’s economy to wean itself off its reliance on real estate. At the same time, he expects the coming year to be a difficult one, with financing still very tight.

(Updated with comments in paragraph 15 of Preqin report.)

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