Private equity in China: Rising to the next level

[[DownloadsSidebar]]

Over the last decade, limited partners (LPs) searching for outsized returns at scale invested heavily in general partners (GPs) focusing on China’s growth story. For several years, China-related fundraising in private markets cleared $100 billion, which left private equity investors flush with dry powder. However, the combination of plateauing economic growth and rising valuations is creating a more challenging environment for growth-oriented private equity investors to deploy greater sums of capital.

To continue generating outsized returns, private equity investors need to look beyond passive buy-and-hold growth strategies, and shift towards larger, actively managed investments such as buy-outs. GPs need to embrace sophisticated value-add strategies across all elements, including fund strategy, deal process, and portfolio company management, to execute investment theses based on productivity improvements with the potential to reshape Chinese companies that grew rapidly. Thus, we see the need for private equity investors in China to make four structural shifts:

  • Broaden the sourcing aperture and deal execution capabilities
  • Build an approach and team structure to actively extract value
  • Align the operating model and incentives across deal teams and operating groups
  • Develop China-specific insights and investment theses to shape Chinese industries

In this paper, we review the capital in-flows and deployments made by private market investors in China over the last cycle, with a focus on private equity, and assess the implications as China’s private investment market matures. We define private equity investments as those included in buyout, growth, hybrid, balanced, secondaries, turnaround and co-investment funds. We define venture capital investments as those included in seed, early-stage, venture or expansion funds.