Industry insiders say China’s private equity industry, which was still in its infancy only three years ago, could grow to 1tn yuan over the next five years. And Chinese private equity firms will be able to compete head to head with global giants like TPG, Carlyle, KKR and Blackstone.
It is a popular view that China’s private equity market, which so far has been dominated by foreign firms, will increasingly favour domestic players in the future because they are better positioned to fund small and medium enterprises (SMEs). According to Han Zhisen, vice-secretary general of the Beijing Private Equity Association, the fact that SMEs do not have sufficient capital to grow provides local private equity firms with a good opportunity to develop and prosper.
Limited access to expansion capital for SMEs has led entrepreneurs to private equity for growth capital to fill the breach. As a result, more than 80 per cent of PE investments are in the form of capital to finance growth.
More interestingly, private equity -financed companies have been more profitable and more successful in creating jobs than their publicly-listed peers in China over the past seven years, according to a survey conducted by Bain & Company and the European Union Chamber of Commerce in 2009. Private equity-backed firms also pay significantly higher salaries, outperforming those of listed firms by 7 per cent.
Calling all i-bankers
China’s increasing need for private investment, partially due to strong economic growth and limited access to the public market, has attracted a large number of high-profile investment bankers to join the PE industry. This trend will continue because of the potential for attractive financial return in such a young, expanding industry. Some private equity managers have been known to earn in excess of 10m yuan per year.
Years back, Fred Hu, Goldman Sachs’ chairman in China, quit the bank to establish his own private equity fund in China. Fang Fenglei, another Goldman veteran, left to form a private equity fund with Singapore’s sovereign wealth fund Temasek. Both of their funds focus on Chinese deals.
It is definitely a good sign that more and more high-profile individuals are joining the PE industry because it shows confidence in this burgeoning field. Recently, the growth of yuan-denominated funds has created hiring demand for seasoned professionals with strong industry expertise and high personal integrity, who have seen several economic cycles.
And it seems they are plenty of candidates willing to leave the investment banks.
“What’s going on with the investment banking model makes those top talents consider joining private equity, venture capital and other buy-side investment opportunities. A sense of ownership could also be a strong factor driving bankers to form PE funds. But you do not make money overnight in private equity. It requires long-term strategic and industrial skills,” says Andrew Chang, China associate director of a well-known executive research firm.