paper_private equity in china
DESCRIPTION
Paper_Private Equity in ChinaTRANSCRIPT
Private Equity in China
A Comprehensive Overview
Ameya PatkarAhmed TariqPiedong Qui
Syed Ibaduddin Hyder
ContentsIntroduction.................................................................................................................................................2
Deal Origination...........................................................................................................................................2
Private Equity Structure and Rising Competition.........................................................................................3
Tight Regulatory Implications and Way Forward.........................................................................................4
Opportunities & Challenges.........................................................................................................................5
Opportunities..........................................................................................................................................6
Challenges...............................................................................................................................................8
Attractive Investment Sectors...................................................................................................................10
The VIE Structure.......................................................................................................................................10
Recent Issues of VIE...................................................................................................................................11
Future of VIE and China PE........................................................................................................................12
SETTING PRECEDENCE FOR THE FUTURE OF PRIVATE EQUITY..................................................................13
TRENDS......................................................................................................................................................14
REFLECTIONS: GOING FORWARD..............................................................................................................16
BIBLIOGRAPHY:..........................................................................................................................................18
IntroductionChina’s accelerated economic growth in the past decade has led to unprecedented expansion in bank
lending and bond issuances. However, these sources of financing have not fully bridged the financing gap
faced by Chinese companies, therefore private equity played the role as an additional source of capital for
China’s corporate sector. Also, investors with surplus capital have viewed private equity as another asset
class and have taken private equity exposure in an emerging market like China for diversification
purposes (Alexander & Casey, 2012).
The PE firms are driven by China’s positive IPO environment and high exit multiple valuations giving a
potential exit plan for their private equity investments. Other exit strategies like private sale have also
been faring well but IPOs have been more dominant in China.
This report intends to portray a holistic view of the private equity space in China deal origination,
structuring, investing and divestment in China. It then discusses the various opportunities and
challenges and attractive investment sectors. Moreover, it sheds light on how wills government
interpretation and public discussions on VIE (Variable Interest Entities) change the fundamental aspects
of the industry and finally dwells upon the future of China’s private equity market? Trends and
prospects
Deal OriginationPotential deals in China are a lot to begin with however there are enormous challenges in the Chinese
private equity market. According to John Zhao (CEO of Hony Capital), structurally speaking many small
and mid-sized companies in China lack good management, proper accounting procedures and maintain
multiple sets of books, which makes due diligence procedures lengthy and difficult for PE firms
(Economist, 2012). Essentially with so much competition in the market from other PE firms, closing the
deal sooner is a priority for PE firms especially when a lot of capital from domestic and foreign investors
is chasing deals in China. Apart from this constraint, the quality of management conflicts with the aims
and objectives of PE firms in China creating agency problems for PE firms.
PE market in China has witnessed a drop in fundraising and investment activity in 2012 as per needs and
opportunities arising in the Chinese economy (Lee, 2012). This may sound alarm bells for various PE
firms already invested into Chinese companies because lower capital and deal flows may shake their
confidence in staying invested and may launch clauses to exit their investments. Even though China’s
growth is forecasted to be slower than before in 2013, its GDP will still be growing at six to seven percent
which is sufficient to sustain the level of opportunities for PE firms as investment grade companies
provide at least double the growth rate and healthy returns (Lee, 2012).
Private Equity Structure and Rising CompetitionAllen Lee (2012) has categorized PE funds in China into four groups:
1. Affiliated funds: captive or third party funds managed by affiliates of institutions
2. “Princeling funds”: known for links to prominent and influential Communist officials with vast
network access and strong political clout
3. Independent funds: with no corporate or political affiliation
4. Foreign Funds: US-dollar denominated funds headquartered outside of mainland China
This categorization carries importance because in China affiliation with different centers of power is
important as it speeds up approval & execution of transactions by the government. Therefore existing
foreign PE firms mostly endeavor to set up PE funds in partnership with local groups or firms in China
(including state-owned enterprises or firms with connections).
As opposed to spending time and money for due diligence, local PE firms rely increasingly on their
network of contacts to form opinions and make decisions faster based on gut instincts in executing deals
as compared to foreign PE firms, which further increases competition for foreign firms (Cheng, 2011).
It is important to notice the extraordinary government support provided to growth of domestic PE firms
so that all funds raised, invested and exited remain within China. Part of the reason why competition has
increased is also because of the high number of domestic PE firms entering the industry where the
government has allowed them to raise yuan-denominated funds and to convert corporate investment
houses to limited partnerships so they’re able to raise funds from wealthy Chinese individuals. On the
other hand, the government has made it more difficult for foreign PE firms to invest dollar-denominated
funds from offshore holding entities. (Gordon, 2013)
This channel has clearly helped to make fund-raising even easier and more flexible for domestic PE firms.
This way an advantage is given to domestic firms, which are already well rooted in the system and have
the ability to quickly source and sign deals. (Gordon, 2013)
Tight Regulatory Implications and Way ForwardCompetition in the PE industry is certainly healthy and shall go a long way to create a diverse set of firms
to contribute to the long-term growth of companies in China. However, the tilt towards domestic firms
clearly shows on how China still wants RMB funds to stay within China and restrict major portion of PE
business with local limited partners.
Such an environment may restrict the truer form of competition, as lesser PE firms from the rest of the
world would want to set-up shop in China. But in the future it may be expected that with
internationalization of the renminbi, China would be more open in inviting PE firms from around the
world, including offshore holding entities, to invest in China.
Relatively larger PE firms, like Blackstone, KKR, TPG and Carlyle Group still find their way through
partnerships with local firms or business groups. Also, their scale and level of experience in private equity
is unmatchable. Another competitive advantage held by foreign firms is the access to cheap capital due to
low interest rates prevailing in their markets as opposed to higher rates in China (Gordon, 2013). This
way through borrowing opportunities they are able to get hold of bigger deals, a space where not many
PE firms venture in. This not only helps them to invest but create effective channels to exit their
investments as well. In the partnership they may be able to sell their stake to the partner and exit the
market, whereas on a standalone basis there are numerous regulatory issues that arise for foreign PE
firms. To circumvent regulatory issues, the PE firms have teamed up with local governments in China to
raise yuan-denominated funds and invest in local companies (Gordon, 2013). This shows that despite
barriers raised by the Chinese government, foreign PE firms are still interested in coming to China and
have found different ways to counter disadvantageous measures taken by the government of China. The
deal potential in China is still big enough to attract foreign PE firms and it is estimated by Bain Capital
that the private equity industry in China still has $43 billion of deal potential to harness.
Opportunities & ChallengesThe Chinese economy has witnessed one of the sharpest growth rates and has been one of the main
drivers of growth for the global economy. The country of 1.34 billion people has a Gross National Income
of $4,940 which has been consistently rising since 1993.
19931995
19971999
20012003
20052007
20092011
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
GNI per capita (current US$)
GNI per capita (current US$)
Source: World Bank Data
As millions of people join the rank of middle income category they demand varied goods and services
(Bunder, 2013); considering the significant size of the country’s population this presents a huge
opportunity for companies to expand. Consequently this translates into opportunity for private equity
firms that not only fill the funding gap for many of the businesses, which grew from “mom and pop
shops” to size businesses, but also provide them with better managerial talent and expertise (Deng, 2013).
While the huge market potential provides opportunities for private equity firms in China, however at the
same time numerous other factors present challenges for these firms.
OpportunitiesThe Chinese economy for the better part of its history has relied primarily upon its export as a driver for
GDP growth; however the downturn in Europe and USA has had an impact on its export and China is
now transitioning to a demand driven economy (Bunder, 2013). Nonetheless it should not be expected
that the transition from an export led economy to a consumer driven economy would be a smooth one,
especially owing to the uncertainty that surrounds the global economy, the following graph shows the
annual GDP growth rate for China (Bunder, 2013).
The volatility in China’s economy has resulted in reducing the public market valuations, the price to
earnings ratios have declined from 17 time forward EBITDA in early part of 2011 to 12.6 times forward
EBITDA by the end of 2012 (Bunder, 2013). This works like a double edged sword for private equity
firms; while on one hand it results in lower exit multiples for firms, but at the same time it also lowers the
value of target firms at this point in time and therefore provides the opportunity to earn higher multiples
from these in the future.
The following graph shows the decline in forward price to earnings ratio for Shanghai A shares in 2011
and 2012 (Bunder, 2013):
Another byproduct of the declining stock market multiples is the pressure on stock prices of listed
companies which find it better to take their company private. Furthermore, falling multiples is not only a
feature that is common to Chinese stock exchange only but also to other stock exchanges as well. One
such example is that of Focus Media that was taken private for $3.7 billion. The company which is based
out of Shanghai was listed on the Nasdaq in 2005 at an average multiple of 35 times forward earnings,
however by 2012 the stock had come under pressure and the company’s forward multiple had gone down
to 8.3 which seemed attractive to the consortium of The Carlyle Group, CITIC Capital Partners,
Fountainvest Partners and China Everbright to bid for the company (Bunder, 2013).
Distressed assets also provide an opportunity for private equity funds to enter the Chinese markets; the
Private Equity round up for China by Ernst & Young states that a significant number of financing for
firms in China comes in the form of bank loans and some of these would turn into non-performing loans.
This presents an opportunity for private equity funds that have the risk appetite to invest in these
distressed firms and turn them around. Reportedly two funds to the tune of $4.6 billion were raised in
2012 to finance distressed assets (Bunder, 2013).
Moreover, some regulatory forces have also worked in favor of private equity firms in China. One such
example is that of China Insurance Regulatory Commission (CIRC) which in 2010 allowed Chinese
insurance companies to invest up to 5% of their assets in domestic PE firms which unlocked insurance
industry’s pool of an estimated value of $ 1 trillion. This regulation was further relaxed by the CIRC in
July 2012 and allowed insurance companies to enhance their investment in PE firms up to 10% of their
assets and in October 2012 this the CIRC issued regulations which allowed insurance companies to invest
in foreign PE funds as well (Bunder, 2013). As a result the National Social Security Fund (NSSF)
announced that it would enhance its investment in PE funds by more than 50% from $3.1 billion to $4.8
billion by the end of 2012 and as of September NSSF’s investment in PE funds had risen to $3.7 billion.
Challenges The Private Equity industry in China faces a number of challenges. The biggest and immediate challenge
that PE firms face is their ability to exit via IPOs. The China Securities Regulatory Commission (CSRC)
stopped the process of approving listing of companies in October 2012 in a bid to reform and stabilize the
domestic market. According to estimates there are more than 7,500 unexited private equity investments in
China from deals executed since 2000 (Rabinovitch, 2013). While delay in exit is one obvious
consequence of the halt on approval process, this has already created significant problems for PE firms
that were solely focused on taking advantage of the arbitrage between the private and public valuations
and therefore operated on the business model of investing in companies and then taking them public in a
short time to unlock huge returns. One such example is that of Kunwu Jiuding Capital that looked for
companies that were most suited for an immediate IPO. This model allowed Jiuding to earn returns up to
600% at times and made it into one of the largest PE firms in China with a capital of over $1 billion.
Considering the short time it took to make exits, Juiding promised investor to return their capital within
four to six years which is half the time promised by firms such as Carlyle or Blackstone. However, the
recent block on the approval process puts a significant pressure on PE fims like Jiuding Capital (Fuhrman,
2013).
Another side effect of the break in the IPO process is the fact that it makes it difficult for PE firms to raise
funds, especially mid-tier funds that find it difficult to convince limited partners to put up money ("China
pe industry," 2013).
PE firms in China face another challenge, which might be minor in comparison to the other obstacle is
that going public is considered more prestigious than being bought by PE firms (Deng, 2013).
Regulatory oversight is another development that the private equity industry in China faces. The CSRC
has issued draft revisions to China’s Securities Investments and Funds Law which would treat PE funds
as securities and would require more disclosure from PE firms (Bunder, 2013).
Moreover, the regulatory environment makes it difficult for foreign private equity firms as well,
especially in terms of repatriation of fund from China. Exit proceeds are subject to review by State
Administration of Foreign Exchange (SAFE) and the proceeds should equal the “reasonably expected
returns from a legitimate transaction in China” (Deng, 2013). Furthermore, the dividends or exit proceeds
should be repatriated in a timely manner or risk being viewed as “disguised foreign loans”. Judy Deng in
her journal article published in the Journal of Private Equity in summer 2013 states the following:
“According to China’s foreign currency regulations, a foreign loan—that is, a loan extended by a
non-Chinese party to a Chinese party—must be registered with SAFE as a capital account item.
A disguised foreign loan is a loan extended directly or indirectly by a non-Chinese party that is
not registered with SAFE. It is anticipated that “disguised foreign loans” could attract more
scrutiny in the future when the pressure on renminbi’s appreciation is more significant. By the
same token, if the exit proceeds are “recycled” for reinvestment in a Chinese entity and if such
reinvestment is completed without the approval of MOFCOM, the relevant Chinese tax
authorities could challenge the transaction on the same grounds.”
Apart from the regulatory oversight, Darek Klonowski in his article, Private equity in emerging markets:
The new frontiers of international finance, noted that private equity firms are often subject to politically
driven process and that experts believe that the recent political change might be less open to foreign
investment (KLONOWSKI, 2013).
Attractive Investment SectorsIn its report titled “Asia Pacific Private Equity Outlook 2013”, Ernst & Young surveyed 50 private equity
general partners, 30 institutional investors (LPs) and 20 private equity investment bankers on their
outlook for private equity in 2013. The respondents to the survey believed that “Energy, mining and
utilities”, “Consumer” and “Technology media and telecommunications” will witness the greatest amount
of private equity activity in the coming year. This is not surprising considering the burgeoning middle
class in China which has more discretionary income and therefore would have a significant demand for
the services provided by the three sectors identified above (Buxton, 2013).
This is further supported by the fact that Hony Capital recently established a fund to the tune of 3 billion
yuan ($489 million) with Shanghai Media Group to invest in production of film and television series,
which is expected considering that revenues from the media and culture industry are expected to reach 3.2
trillion yuan (5% of GDP) by 2015 (Cheung, 2013). Similarly National Film Capital has raised a 1.5
billion yuan fund to build movie theaters across the mainland (Cheung, 2013).
Another testament to the focus on telecommunications industry is CVC Capital Partner’s investment in
Hong Kong Broadband Network which provides high speed broadband and other telephony services to
more than two million customers (Bunder, 2013).
The VIE StructureVIE (Variable Interest Entities) has been well known in China PE markets since Sina was listed in
NASDAQ in 2000 which is also known as the “Sina-Model”. It belongs to offshore listing, one of the two
models for Chinese companies going for IPO (Initial public offering). The other one is onshore listing
such as A-Share listing. The VIE structure is very common and many Chinese internet companies are
using this structure to be listed on NASDAQ, NYSE or HKSE, which include Sina, Sohu, Baidu, Ctrip,
YouKu, Tencent, Alibaba.com (delisted in 2012) and LightinTheBox (the most recent Chinese company
listed in NASDAQ on 6.Jun.2013) etc.
The following graph shows a typical VIE structure (David, 2011). The offshore holding company holds a
controlling interest over the domestic operating company through a series of “contractual arrangements”
rather than through direct majority equity ownership (Donald, 2011).
The VIE structure helps the foreign investors to deal with Chinese regulatory restrictions on certain
industry sectors such as Internet, telecommunications and media etc. It also helps the foreign investor to
avoid the complicated approval procedure for a foreign direct investment. However owing to the unique
“contractual arrangements”, VIE has always been under the arguments whether it is a “legal” and
“effective” structure to sustain.
Recent Issues of VIEThe VIE structure came under much discussion in 2011 and 2012 after two Chinese companies
encountered the issues related to VIE.
In May.2011, Alipay, an online payment company controlled by Alibaba.com, was transferred to a
domestic Chinese company controlled by Jack Ma without the approval of Alibaba’s board, which
included one board of director from Yahoo. The reason of the transferring ownership was because the
People’s Bank of China “allegedly” wouldn’t grant the online payment permit to “online payment
companies that have foreign ownership, whether directly through equity interests or indirectly through the
use of the VIE structure” (Brain, 2011). Although Yahoo and Alibaba settled this issue by signing one
agreement that Alipay would pay Alibaba 37.5% of the valuation when Alipay was going IPO, it was still
unclear whether the permit would be granted to Alipay if it hadn’t been transferred out of Alibaba. This
incident shows the risk that Chinese authority still has the possibility to apply the regulation on the VIEs
for the certain purposes and also show that this kind of contractual arrangements have a high risk.
In Jul.2012, New Oriental Education and Technology Group (EDU), one famous Chinese private
education firm, announced to restructure it’s VIE ownership (China.Org.CN, 2012). Chairman Michael
Yu had taken back all the ownership of its VIE from the other 10 original shareholders who had left EDU.
Although Michael Yu claimed the purpose was to help the holding company to have a clearer VIE
structure only, SEC (U.S. Securities and Exchange Commission) still launched the investigation over its
possible accounting irregularities. Although SEC claimed the investigation was towards EDU only not the
whole VIE structure, the public still regarded this incident as the risk of VIE which had an unclear
structure and ownership without the strict accounting regulation in general.
Future of VIE and China PEDespite the hot arguments on VIE, LightInTheBox Holding Co., whose structure is also based on VIE,
went for IPO in NASDAQ on 6.Jun.2013. The fact is that many Chinese companies listed offshore are
still under VIE structure which includes giant companies such as Baidu with US$30B-$40B market
capital. The VIE structure will be most likely continued for several more years until some clearer
structure could take place in the China PE markets.
However both foreign investors and Chinese companies’ founders should be aware of the risks of VIE
structure when they are considering to construct one VIE company.
1. Change in regulation: There is still no real operational regulation from Chinese authority for VIE.
The risk is still remaining that Chinese authority may ban some of the permits from VIE in the future,
which would lead to the similar issue as Alipay’s case.
2. The risk of “contractual arrangements”: Foreign investors have no direct equity ownership of the
Chinese operating company and rely on the contractual arrangements only. It will be difficult for the
investors to correct some management issue if any. There is also lack of complete law to handle such
issues; therefore the rights of the foreign investors are not well protected.
3. There are still other risks such as lack of the complete accounting regulation, the risk of tax and the
foreign exchange control etc.
With all the kinds of existing risks, China PE markets may need to consider the effect of insufficient
funds raised from the VIE structure in the future. One recommendation is to further formalize the VIE
structure by clearly defining the regulations to reduce the uncertainty. The other possibility is to develop
the local PEs. By providing the training and practicing grounds and also providing the certain policy
support, it will help to grow the local PEs faster.
SETTING PRECEDENCE FOR THE FUTURE OF PRIVATE EQUITY Since 2010, there were whispers over valuations, shortened initial public offering (IPO) durations, and a
growing number of private equity applications, pending approvals and IPO’s. In addition to the enigma
that accompanied private equity (PE) deals, China Security Securities Regulatory Commission (CSRC)
had also started looking into suspicious dealings pertaining to preeminent companies like Kunwu Jiuding
Capital. The company’s PE developing style was developed to perfectly adapt to the Chinese business
environment. It did not look to assess its peers, industry, or strategic advantages. In fact, it only was on
the look out for deals where it could essentially make a quick buck – basically seek out companies that
met requirements for an immediate domestic IPO. Most of the deals Kunwu Jiuding Capital undertook,
took advantage of arbitrage opportunities with respect to large valuation differentials between private
equity entry multiples and expected IPO exit valuations. In fact so blatant were the company’s executives
that their pre-investment work consisted mainly of simulating the IPO approval process of the CSRC. If
these simulations implied a quick speedy CSRC IPO approval, the company was given access to Kunwu
Jiuding capital. The final objective – cash out in less than two years.
Clearer most shocking was the lack of direction and ignoring of private equity fundamentals and
valuations. And strangest of all – it actually worked for several years. The company made a large number
of these deals on such investment philosophy and in many instances cashed in returns in excess of 600%.
Realizing the potential goldmine they were sitting on, they went on with this farcical act and ironically
became one of China’s largest PE firms with over $1 billion in capital. (Fuhrman, 2013)
Since mid-2011, CSRC decided to investigate into the activities of PE firms in China. Intent on cleaning
up the act, CSRC authorities wanted to magnify the issue that PE companies could not predict, anticipate
or hedge against the IPO process. With no clear indication of what it had planned, CSRC first slowed
down the number of IPO approvals and on October 2012, halted IPO’s altogether. This seriously affected
the private equity industry in China and put a dent in the previous trend of Chinese private equity firms
raising money and promising its RMB investors a return on capital within four to six years. In many
positive ways, this reflected on the belief that CSRC authorities were intent on showing that undertaking
an IPO should was a function of valuations, political and institutional policies and that these could not be
predicted.
TRENDSFor almost a decade, the private equity market in China was as sexy as it could get. In fact according to
statistics by China First Capital, 2001 to 2012 witnessed this market farming almost 10,000 deals at a
combined value close to $230 billion (Gough, 2013). The year 2012 witnessed the Chinese Private Equity
market going through major upheaval. And in 2013, we are now witnessing a decimated market, in which
PE industry in China has lost a significant amount of its steam. Investments flowing in are close to zero
and particularly interesting is the fact that Renminbi fundraising is almost non-existent. On the whole, this
drop has accounted for a 50% year-on-year drop for capital entering China-focused vehicles as a whole.
Sadly, with negligible activity, the only beacon of light in 2012 was the $3.7 billion private equity tranche
that formed part of Alibaba Groups $7.6 billion buyback from Yahoo.
Gone are the days, when select investors were lining up for pre-IPO opportunities. In China, this has
special been extremely lucrative for investors who were simply looking to buy and hold for the
prerequisite average three-year period before finally selling after the lock up period with very comfortable
valuation premiums. With returns around ten times the original investment, it was extremely normal for
investors to even bribe CSRC officials to get the needed approvals. However times have changed
drastically and this is no more the case. 2013 has witnessed CSRC demanding stringent conditions be
filled by all applicants. Furthermore, the CSRC is now requiring underwriters of applicant companies to
reinvestigate the authenticity of the filings. Taking a stand of this magnitude shows how serious the
CSRC is when it comes to building a transparent private equity market in China. And so far this is
beginning to show results - Out of the 600 applicants waiting for approval, 166 companies have already
withdrawn their applications (Zhou, 2013). As it currently stands, thousands of private equity company’s
in China have pending applications at different stages in the process pipeline. And according to recent
estimates, this is a nightmare scenario. Sources say that there are 100 companies that have approval are
waiting to IPO, 600 with submitted applications waiting for approval – pending CSRC investigation,
2,000-3,000 waiting to submit applications and 7,500 that remain un-exited. Sadly, the numbers only
paint half the picture, reality only hits when confronted with the fact that CSRC has never approved more
than 125 IPO’s in any given year (Fuhrman, 2013).
Adding fuel to this fire is a slowing economy that has given rise to a falling investor confidence and both
individual and institutional investors are not keen on purchasing shares from IPO’s. In fact 2013, has
witnessed pre-IPO numbers falling from the lofty ten times average exit returns to currently two to three.
To make matters worse, this lack of confidence in Chinese private equity has made its way to the US
shores and even NASDAQ surprisingly is curtailing its once open door for Chinese companies. Adding to
the NASDAQ woes, are accounting fraud scandals that further elicited a crackdown by the Securities and
Exchange Commission (SEC) - eventually making interest in new Chinese offerings even more
unpalatable. Finally, adding to complexities - the issue of the lack of exit strategies in PE firms in China
have always been a great concern to institutional investors and pension funds in the United States, Europe
and Asia alike.
With CSRC dropping the gauntlet, slowing down economic conditions, stricter laws and checks in place,
the future for private equity in china is currently bleak. In essence, fears over cooked books, valuations
and wrongdoings have made the IPO market a Russian roulette playground. A few analysts have in fact
indirectly blamed the Chinese economy for the crazed demand and over-investing in the pre-IPO period.
REFLECTIONS: GOING FORWARDWith respect to prospects going forward, there seem to be mixed sentiments. Recent forecasts for slower
growth, stricter CSRC regulations and changes in macro conditions all point to uncertainty about future
economic policies and regulations with respect to the Chinese PE market.
However many analysts in China and the west still feel, that Chinese GPs and LPs are optimistic and that
the private equity industry in China will find its way eventually. The shake out should do more good than
bad and the eventual results should fare better for company’s wanting to IPO in the future. Using the
thumb rule - investment grade companies would having growth rates that are twice that of the economy,
indirectly supporting the sentiment of an achievable 12 – 13 % returns in China. The trend gong forward
should be on how LP’s focus on adding value - not simply providing capital, and waiting to simulate IPO
approval processes like in the past. In the future, Chinese companies will need to adapt the quintessential
private equity model, invest for longer horizons and actually valuing a company on medium to long-term
prospects (Lee, 2012). Because of the lack of required due diligence mentioned above, I see the private
equity market crippling over the next few years.
For Chinese private equity market to develop, there has to a drastic change in the thought process of
investors and authorities. In terms of the future, many analysts vision - “Majority buyout” as a developing
trend. Currently, the lack of well established debt markets in China do not support large LBO deals, but
with the current sentiment of IPO’s not picking up in the months ahead – a lack of confidence for the
market with investors not showing any interest in the IPO shares floated, buyouts should start to become
more common in the years ahead.
Direct secondary is another viable option that has gained momentum in the past year or so. Analysts feel
that institutional and dedicated investors are on the look out for financing private equity investments in
the secondary market. And although the market for secondary is still patchy, there are essentially firms
like AXA Private Equity and Neuberger Berman looking to delve into the Chinese market going forward.
Furthermore, global investment banks like Goldman Sachs and JPMorgan Chase, Morgan Stanley and
few institutional investors are said to have an increasing appetite especially within China. An additional
advantage of direct secondary’s is that they complement the structure of private equity by increasing
liquidity within the market (Zhou, 2013).
China’s private equity industry is definite at a turning point, unchartered territory of kinds. With the
established pre-IPO model loosing its footing and regulators taking a firm stand, I see the private equity
market taking time to evolve from this flux.
BIBLIOGRAPHY:
1. Alexander, S. & Casey, M. (2012). The Evolution of PE in China. Emerging Markets Private
Equity Association.
2. Bunder, J. (2013). Private equity roundup — china. Ernst & Young, Retrieved from
http://www.ey.com/Publication/vwLUAssets/PE_in_China_unprecedented_growth_2012_recap/
$FILE/China_sees_continued_private_equity_activity_amid_a_year_of_historic_change.pdf
3. Brian Womack (2011, May,12), Yahoo Says Alibaba Transferred Alipay Without Telling Board,
Shareholders, Retrieved from BLOOMBERG
http://www.bloomberg.com/news/2011-05-12/yahoo-notified-by-alibaba-of-alipay-
reorganization-on-march-31.html.
4. Buxton, M. (2013). Asia-Pacific private equity outlook 2013. Ernst & Young, Retrieved from
http://www.ey.com/Publication/vwLUAssets/Asia-
Pacific_private_equity_outlook_2013/$FILE/Asia-Pacific_private_equity_outlook_2013.pdf .
5. Cheng, Allen T. (2011). Western Private Equity Giants Bet Big on China. Institutional Investor.
Nov 2011
6. Cheung, S. (2013, June 14). Why watching tv is good for chinese private equity. The Wall Street
Journal. Retrieved from http://blogs.wsj.com/privateequity/2013/06/14/why-watching-tv-is-
good-for-chinese-private-equity/
7. China.Org.CN (2012,Jul,31) What is VIE issue surrounding New Oriental? Retrieved from
http://www.china.org.cn/business/2012-07/31/content_26075616.htm .
8. China pe industry faces challenges. (2013, January 3). The Asset, Retrieved from
https://www.preqin.com/item/china-pe-industry-faces-challenges/102/6056
9. Deng, J. (2013). The regulatory landscape for private equity investment in the secondary market
in china. The Journal of Private Equity, 16(3), 41-47. Retrieved from
http://www.iijournals.com/doi/pdfplus/10.3905/jpe.2013.16.3.041
10. Deng, C. (2013, June 10). For private equity, a door to deals opens in china. The Wall Street
Journal. Retrieved from
http://online.wsj.com/article/SB10001424127887324904004578536893482847254.html
11. David Roberts and Thomas Hall (2011,Oct). VIE Structures in China:What You Need to Know,
Retrieved from http://iis-db.stanford.edu/evnts/6963/TICL_-_VIE_Structures_in_China.pdf
12. Donald Rudow(2011,Aug,08). Chinese Variable Interest Entities: Basic Thoughts on Valuations ,
Retrieved from http://seekingalpha.com/article/285524-chinese-variable-interest-entities-basic-
thoughts-on-valuations
13. Economist (2012). Hony ahoy: Private equity in China. P70.
14. Fuhrman, P. (2013, June 11). [Web log message]. Retrieved from
http://www.chinafirstcapital.com/blog/
15. Gordon, S. (2013). Chasing the Deals in China’s Crowded Private Equity Market. Forbes India.
Retrieved from: http://forbesindia.com/article/ckgsb/chasing-the-deals-in-chinas-crowded-
private-equity-market/35237/1
16. Gough, N. (2013, January 10). Private equity in china: Which way out?. The New York Times.
Retrieved from http://dealbook.nytimes.com/2013/01/10/private-equity-in-china-which-way-out/
17. KLONOWSKI, D. (2013). Private equity in emerging markets: The new frontiers of international
finance. The Journal of Private Equity, 16(2), 20-37. Retrieved from
http://www.iijournals.com/doi/pdfplus/10.3905/jpe.2013.16.2.020
18. Lee, A. (2012). The four arms of chinese private equity. The Asian Venture Capital Journal,
25(47), 3. Retrieved from http://search.proquest.com/docview/1349785049?accountid=13876
19. Lee, A. (2011). The RMB and Chinese private equity. The Asian Venture Capital Journal. 24.2
20. Rabinovitch, S. (2013, May 13). Inside business: China private equity bitten again by fang.
Financial Times. Retrieved from http://www.ft.com/intl/cms/s/0/28a3a580-b6cd-11e2-93ba-
00144feabdc0.html
21. Zhou, B. (2013, April 22). [Web log message]. Retrieved from
http://www.albertoforchielli.com/2013/04/22/the-future-of-chinas-private-equity-industry/.