Private Equity Firms Settling Into China

I have been closely following the growth of private equity in China because I believe it is one of the most important and exciting new markets for the industry. As the country opens up more and more to financial institutions by easing typically stringent regulations, the potential for buyout firms operating in China is huge. This is why you see many firms moving into China even though they may not begin doing large deals for a few years still. It's about getting your foot in the door and setting up offices in the country before your competition.

There are still major obstacles to working in China but the prospects are bright and many firms believe it is worth navigating complicated (and sometimes unfair) regulations. The government is working to make the country more receptive to private equity firms, with actions like this week's announcement that China will allow insurers to invest up to 5% of their total assets in private equity. These types of initiatives are key in developing private equity activity in China.

Yuan-Denominated Funds Dominate

Although there have been some promising private equity funds in China, the industry still lacks the credibility that it has gained in other parts of the world. It is encouraging that private equity firms have started opening funds in the Chinese yuan currency. Having a fund denominated in the local currency has helped these buyout firms attract local investors, which is a key step to working in the country successfully.

David Rubenstein told the audience at a WSJ China Financial Markets Conference, "“For any of the large private-equity firms in the West to be a real player in China, you probably should have a

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How the Western Equity Markets Will Benefit From Chinese Growth

After the slowdown we had in the western economy, China has become the key economic engine for the global growth. Most of the time US equity markets look out for the Chinese market for its direction hoping that a continued growth in China will help the US companies. In my view Chinese economy has little to do with how the US companies will do in the short term. In my view structural changes taking place in China will help the US and European companies in the long run as these companies are better prepared to benefit from these changes.

Short term: It is US economic recovery that will drive the market, not the emerging market recovery

By looking at the most recent full year numbers available for S&P500 companies, it is clear that more than half of the revenue for US companies is generated within the US itself. Interestingly the numbers suggest that the significance of the US market increased over the last 3 years. So for the earnings growth of the US companies what matters are the developments taking place in the home market, not in the emerging markets.

Table 1: Geographical breakdown of revenue

2007

2008

2009

US

55%

56%

59%

EU

10%

12%

10%

UK

2%

1%

1%

Other

33%

31%

31%

100%

100%

100%

Source: Bloomberg

(Click charts to enlarge)

Chart 1: The significance of US market for the US companies


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