Private investors are caught off guard in China as top companies fail to secure exit deals

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The world’s biggest private equity groups have been unable to sell or list their China-focused portfolio companies this year, as Beijing’s crackdown on public offerings and a slowing economy keep foreign capital in the country.

Of the 10 largest international Private equity There are no records of groups operating in China that have listed or sold a Chinese company in an M&A deal this year, data from Dealogic show.

The pace of exits has slowed since Beijing introduced restrictions on the ability of Chinese companies to list in 2021, but it is the first year that this has happened in at least a decade.

Buyout teams rely on their ability to sell or list companies, typically within three to five years of buying them, to raise money for pension funds, insurance companies and others that manage their money.

of Difficulties in doing this In effect, future earnings are uncertain as those investors’ money is locked away.

“There is a growing sense among PE investors that China cannot invest as systematically as it was once thought,” said Brook Silvers, chief executive of Hong Kong private equity group Kaiyuan Capital.

He said companies are facing “weakened exit strategies” on multiple fronts. Chinaincluding damage from a sluggish economy and domestic regulatory pressure.

Many private equity groups have expanded their presence in the world’s second-largest economy, growing rapidly over the past two decades. Global pension funds and others plowed capital into the country hoping to gain exposure to economic growth.

10 companies have invested $137 billion over the past decade, but total exits have only reached $38 billion, Dealogic data shows. Since the beginning of 2022, new investment by those groups has fallen to $5 billion.

Globally, the pace of exits from buyout groups has also slowed. It fell 26 percent in the first half of this year, according to a report by S&P Global.

But stopping at Chinese outlets is particularly difficult. Some pension funds that allocate cash to private equity groups have become wary of the country’s exposure.

“Theoretically you can buy cheap[in China]now, but you need to ask what happens if you can’t get out or if you have to hold for a long time,” said a private markets specialist at a large pension fund. He is not currently investing in the country.

“They don’t expect many exits in China, at least for the next two years,” said a senior executive who runs cash for private equity funds at a major investment group.

The data includes the 10 largest buyout groups that have raised funds for private equity over the past decade: Blackstone, KKR, CVC, TPG, Warburg Pincus, Carlyle Group, Bain Capital, EQT and Apollo. In China. The data does not include Blackstone Real Estate deals.

Private equity firms sometimes buy or sell companies without disclosing them, and such exits may be missing from the data. The companies declined to comment.

In addition to Sino-US tensions and economic slowdown, one of the main factors preventing international buyout groups from investing in the country is the availability of funds.

One reason, Jean Salata, founder of Baring Private Equity Asia, which bought Stockholm-based Ekti in 2022, told the Financial Times in June. “The bar is high” for China deals. Investors ask, “How easy will it be to make money on those investments five years from now?” They were asking.

Foreign buyout groups relied on taking Chinese companies public in the US and other countries only to exit their investments after a few years. But Beijing has introduced new restrictions on offshore listings after banning ride-hailing app DiDi following its New York IPO in 2021.

Overall this year, there were just $7 billion of domestic IPOs in China through the end of November, compared with $46 billion last year, the lowest total since 2019.

This move has led buyout groups to look for other options, such as selling their stakes to domestic and international companies and other buyout groups. But overseas buyers are sometimes reluctant, in part because it closely scrutinizes the U.S. mainland.

One of the few recent exits among the 10 companies came when Carlyle sold a minority stake in McDonald’s Chinese operations Back to America’s fast food retailer last year.

In China’s boom before the Covid-19 pandemic, there were dozens of exits in both listings and mergers and acquisitions, and foreign private equity played a very large role in the mainland’s activity.

As Goldman Sachs CEO David Solomon said at a Hong Kong conference in November, one reason is that investors “Mostly on the side“It was very difficult,” he said of deploying money in China. . . to withdraw capital”.