2021-10-17-安永_中国_-Greater_China_Private_equity_briefing_-_3Q_2021_14页_1mb

Greater China Private Equity Briefing - 3Q 2021 Summary

Executive Summary

The private equity (PE) market in Greater China remains a compelling opportunity for investors despite global economic disruptions. In 2020, China achieved a GDP growth of 2.3%, and the private capital sector has a total AUM of US$1.3 trillion, with expectations of further expansion due to proactive government efforts to strengthen regulatory frameworks and formalize the financial system.

The region is becoming more accessible to private investors, driven by policies such as the Foreign Investment Law, the Catalogue of Encouraged Industries, and the establishment of free trade zones. These measures have created more opportunities for foreign investors, including PE firms, to access fast-growing sectors. However, regulatory changes in certain industries and the impact of new rules on overseas listings present significant challenges for PE players.

Investments

In 3Q 2021, the PE market in Greater China saw US$16.1 billion in capital deployed across 140 announced deals, showing strong investment activity. The technology sector dominated investment, accounting for 49% of the total deal volume and 50% of the total deal value.

Key trends include a shift toward sectors less vulnerable to regulatory changes, such as semiconductors, automation, and sustainable products. ESG-linked investments are also expected to grow due to the government's focus on sustainability and carbon neutrality goals.

Top PE Investments in 3Q 2021 (by deal value)

Exits

PE firms exited 48 assets worth US$15.0 billion in YTD21, with a 60% increase in aggregate exit value compared to YTD20. The average exit size increased to US$417 million, up from US$165 million the previous year. The largest exit was a US$2.1 billion trade sale of China Logistics Property Holdings to JD.com.

The technology and healthcare sectors accounted for 52% of the exits, reflecting strong performance in these areas. Strategic trade sales made up 82% of all exits, with secondary sales being the second most common exit type.

Top PE-backed Exits in 3Q 2021 (by deal value)

Fundraising

Fundraising in Greater China rebounded in 2021, with US$72.5 billion raised across 47 funds, up from US$49.2 billion across 46 funds in YTD20. The average fund size increased by 44% to US$1.5 billion.

There were 13 mega funds (more than US$1 billion) closed in YTD21, compared to 7 in YTD20. US-based KKR closed its KKR Asian Fund IV at US$15.0 billion, while China-based Boyu Capital closed its Boyu Capital Fund V at US$6.0 billion.

Hong Kong continues to be a key hub for offshore funds, with the introduction of the Limited Partnership Fund Ordinance and a tax concession regime for carried interest in early 2021. These measures are expected to enhance Hong Kong's position as a PE investment center in Asia.

Regulatory Changes and Future Outlook

The regulatory environment in Greater China is evolving, with new rules impacting PE strategies. Key developments include:

• Cybersecurity reviews for tech companies with over one million users seeking overseas listings, which may deter IPO exits and redirect them to domestic or Hong Kong exchanges.
• Focus on 'hard technology' in public markets, including new materials, new energy, aerospace, biotechnology, advanced manufacturing, and integrated circuits.
• Encouragement of foreign investments in AI, 5G, blockchain, and automation services through the Catalogue of Encouraged Industries.
• Merger Clearance Review requiring parties acquiring minority stakes to file declarations, increasing transparency and trust for LPs.
• Tighter scrutiny on PE fundraising and probity, with a focus on supporting innovation and start-ups.

Hong Kong is expected to emerge as a more attractive PE hub due to regulatory reforms and tax incentives, especially as US listings for Chinese companies are suspended.

Conclusion

Despite regulatory challenges, the Greater China PE market is poised for continued growth, driven by the government's push for technological innovation, ESG investments, and opening up to foreign capital. Investors are advised to focus on sectors aligned with national strategies and to leverage the evolving regulatory landscape to optimize their investment and exit strategies.