Ft: Challenges ahead for China private equity

"The likelihood of falling returns and tougher exits will make the next 12 months the most challenging in recent times for private equity dealmakers in China, according to a report.

Seven out of 10 investors polled by Deloitte, the professional services firm, said they expected returns achieved from private equity exits to decrease in the coming year, while only 10 per cent expect them to increase."

"Investors cited falling exit multiples, volatile equity markets, previous higher entry multiples and market uncertainty as reasons for their pessimism.

“There will be a big decrease in returns. People won’t overpay for assets like they did when the market was hot,” said one respondent to the survey.

However, another said: “There are still inefficiencies in the Chinese market so there are still opportunities.”

The fall in sentiment suggests an imminent cooling down in investor willingness to compete aggressively for assets following recent record activity in the sector.

Market conditions will also trigger a decline in exit activity over the next 12 months, predicted more than three-quarters of those surveyed.

However, the vast majority of respondents still expect to use the IPO route to exit their investments when markets and prices recover in the near term.

A large number of private equity funds sprang up in recent years to invest in China, largely focused on growth capital because of the ongoing reluctance of state-owned enterprises and entrepreneur-led companies to yield control.

Deloitte’s China private equity confidence survey is based on responses from 30 participants in Chinese private equity.

The survey found that, while the consumer, power and manufacturing sectors continued to benefit the most from private equity investment, more than 80 per cent of respondents expect far higher levels of activity in to China’s clean energy sector. Government subsidies to clean technology make many investments comparatively more attractive for funds, some of which have decided to specialise in the area."