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PE firms, funds grow; experts urge prudence

By Cai Xiao | China Daily | Updated: 2017-08-21 07:44

PE firms, funds grow; experts urge prudence

The assets under management, or AUM, of private equity firms and privately offered funds rose to 9.95 trillion yuan ($1.49 trillion) by the end of July, benefiting from the nation's thrust on mass innovation and entrepreneurship.

Some 20,110 private equity firms and privately offered funds registered with the Asset Management Association of China saw their AUM increase by 26 percent from the January level, AMAC data showed.

Private equity firms accounted for 6.14 trillion yuan, or nearly 62 percent, of funds.

Typically, investors of private equity firms include insurers, government-backed funds, corporates and wealthy individuals.

China's mass innovation and entrepreneurship programs are aiding the development of Chinese private equity funds, said Guo Libo, research head of China-Venture Group, which produces research reports on venture capital and private equity.

China's innovation and entrepreneurship initiatives began in 2014. Last month, the State Council, China's Cabinet, released a guideline that the government will encourage State-led investments as well as private investments in startups, especially those in the high-tech sector, to help finance innovation.

According to a report of China-Venture Group, there were 589 private equity deals in the first half of this year and their investments totaled $28.3 billion, up 4.5 percent year-on-year.

In terms of scale, China's private equity firms and privately offered funds match publicly offered funds, Guo said. In the United States, publicly offered funds' AUM are more than that of private equity firms and privately offered funds.

It's also different in China, where the private equity market is larger than privately offered funds.

"The differences between the two nations show that China's primary market is strong while the secondary market does not perform very well," said Guo.

But he also said that the Chinese stock market's performance has been improving over the last two months, which will help boost confidence of privately offered funds.

According to AMAC, the number of big-size private equity firms and privately offered funds, each with more than 10 billion yuan in AUM, has increased to 176 by Julyend from 133 last year.

Professionally managed private equity firms with sound performance find it easy to manage funds, Guo said.

Ying Wenlu, chairman of Nanjing-based Addor Capital, a private equity firm, said China's private equity market is not short of money, but only reputable firms are able to attract it.

"In the United States, 10 percent of private equity firms manage about 90 percent of the funds in the market, and I believe China will have this trend," said Ying, adding that his firm invested 12.2 billion yuan in 2016.

Agreed Ni Zhengdong, chairman of Zero2IPO Group, a research firm with focus on the private equity and venture capital business. There is an adequate number of investors as well, but good deals are few and far between. So, deals that happen tend to have very high valuations, he said.

"Private equity investors should develop a deep understanding of the industry rather than pursuing popular trends," said Ni, adding that they should have self-discipline to carry out due diligence and negotiations, and the ability to design deal structures properly.

"Investors have to be more cautious on valuations and be more disciplined on transaction terms and structures, to provide a sufficient margin of safety," said Ni.

David Liu, former CEO of KKR China, the local arm of the global private equity firm, said sectors like consumer goods, education, healthcare and environmental protection offer great investment potential.

He said as food safety remains a top priority, many investment opportunities will arise in the next five to 10 years as consumers upgrade to a better quality of life.

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