Private equity firms seek a way out of China after US$1.5 trillion betting spree
- Mounting concerns about the risks of investing in China have seen secondary buyers demanding discounts of 30 per cent to more than 60 per cent, sources said
- Deals in China involving private equity firms are on track to slide for a second straight year, after plunging by 50 per cent last year, according to Bloomberg
Private equity firms that amassed more than US$1.5 trillion of assets in China in just two decades are now struggling to offload once-promising investments they were counting on for hefty returns.
With public markets in a slump and offering unattractive valuations, buyout firms are exploring private sales. But mounting concerns about the risks of investing in mainland China have left so-called secondary buyers demanding discounts of 30 per cent to more than 60 per cent, according to people familiar with the market. Haircuts in Europe and the US are closer to 15 per cent.
Many firms are also looking at an alternative strategy, putting off sales by setting up so-called continuation funds to take over holdings for several more years, according to interviews with about a dozen of private equity investors and advisers. That is also proving challenging.
The lack of easy exits – affecting the likes of Blackstone-backed PAG and Carlyle Group – has shifted the world’s second-largest economy from a vast frontier for buyouts into an uncertain landscape for long-term investing. Demand for Chinese assets cratered in the past few years, with record outflows even from public markets, as the economy struggles to regain traction and concerns mount over the political direction under Xi Jinping.
“We are in more challenging times, very similar to the way we experienced the global financial crisis,” said Niklas Amundsson, partner at Monument Group, a global private placement agent. “China is completely out of favour and global investors are going to put China on hold for now.”