Major players in China's private equity (PE) market are bullish on the sector, with nearly 80 percent expecting to increase their investment activity over the next 12 months, according to professional services firm Deloitte.

Deloitte's China Private Equity Confidence Survey, released Thursday, shows that 79 percent of the PE investors they interviewed are strongly optimistic about the market. This is primarily being driven by a bright economic forecast, particularly the development of yuan-denominated funds.

"All the factors are pointing to a positive outlook for the Chinese private equity market as the market is starting to recover from the economic downturn and we have also seen improved sentiment in the stock market," said Chris Cooper, head of private equity at Deloitte Northern China.

"Coupled with the resuscitation in IPO activities - one of the viable exit routes for private equity - if the economy continues to recover, investment activities will continue to grow as we enter 2011 along with deal size and valuations," he added.

Apart from confidence in the market regarding economic growth trends, Cooper noted that most players believe that the recent surge in domestic yuan funds is bringing a dramatic change to the PE landscape. Nearly all the respondents said they are considering setting up yuan funds as a strategic priority.

Though some respondents expressed concerns about potential conflicts of interest between yuan funds and foreign currency funds as well as regulatory challenges, Cooper believes that the appetite for yuan funds will continue to grow in the medium to long term. He added that in the first half alone, 24 yuan funds were officially set up, raising $1.13 billion in total.

"Over 80 percent of respondents believe that deal competition will become more intense in China due to the increase in the number of home-grown yuan funds and new foreign entrants," said Danny Tong, head of private equity at Deloitte China.

PE activity is also starting to spread to more cities and not just in the key hubs of Shanghai and Beijing as well as coastal regions, he added.

"With the escalating maturity in the PE market in China, a greater penetration of investment activities into the second- and third-tier cities inland will be seen in the near future, including some far western provinces," Tong said.

The survey also reveals that 76 percent of respondents believe that exit activity in the Chinese PE market will increase over the next 12 months, helped by a healthy mixture of supply and demand.

China Daily

(HK Edition 10/15/2010 page2)