2014 was clearly a challenging year for private equity in China. Macroeconomic headwinds emerged as China sought to continue its shift from its export-led roots to a more balanced consumption-driven model and led to a marked secular decline in growth rates from the heady highs of just a few years ago.
However, despite the more challenging operating environment, interest in China remains high for private equity firms.
Fundraising activity increased in China over the course of 2014, with US$30.4b raised by funds focused on the country, according to Preqin. This represents an increase of 16% over the S$26.2b raised in 2013.
Investment activity also increased versus last year, despite the challenging macro environment. PE firms announced investments valued at US$14.2b in 2014, a 31% increase from the US$10.8b in 2013.
Regulatory reforms brought greater clarity to the shape of industry oversight, giving general partners (GPs) clear guidance on registration and disclosure obligations and putting an end to some of the ambiguity that has characterized PE oversight for the last several years. Perhaps more importantly, new regulations effectively increased the potential universe of investible companies for both domestic and offshore PE firms.
As a result, the industry remains well-positioned to capitalize on the many growth opportunities present in the Chinese market. Low PE penetration relative to developed markets, a significant financing gap for small and medium businesses, and the continued growth of the country’s middle class will all provide significant tailwinds for PE investors over the coming years.