Chinese private equity: A compelling growth story
China’s private equity market is now the second largest in the world, and has a strong bias towards quality over quantity – making it an increasingly attractive environment for investors. In this webcast Jun Qian, Head of Investments China, discusses how the private equity market has evolved over the past 20 years, why investors are interested in private equity now and where Schroders sees opportunities including the particularly interesting market in China.
In the past 20 years the fund manager universe has grown significantly, accompanied by a rapid expansion of private equity markets globally. That’s hardly surprising, considering that public listed markets look less appealing today than they have in the past.
There are now 50% fewer listed companies in the US than there were 10 years ago, and private companies are often remaining private for longer. Since 2002, total private equity (PE) holdings within global asset management almost doubled from 9% to 17%, further reflecting the shift in attention from public to private.
Performance-wise in 2020, private equity proved resilient during the COVID-19 crisis, delivering strong investment results with very low risk correlations when compared with the MSCI TR index. This has translated to more capital entering the PE sector in Europe, the US and China.
Effective investment strategies
Specialist private equity managers have a myriad of different investment strategies and opportunities at their disposal, with Schroders targeting particular sectors based on prevailing market fundamentals.
In the current environment, in Europe and the US Schroders is focused on small to mid-sized buyout investments with upside potential through business transformation, reduced pricing cyclicality and conservative use of leverage.
In the Asia Pacific region, our investment focus is on China and India. There is an emphasis on domestic demand, including consumer services and the growing middle class, plus differentiation through direct access to China RMB private equity.
More broadly, for global venture capital investment strategies – in tandem with leading access-restricted managers – Schroders concentrates specifically on technology and life sciences, along with early-stage financing of game-changing companies.
China PE drives growth quality
The Chinese private equity market offers quality investment opportunities powered by consumption upgrades, innovation and SME growth. The numbers are impressive – China has recorded 14 years of high GDP growth, and in 2020 it was the only large economy to record GDP growth at all. In 2021, the World Bank expects China to achieve an 8% increase in GDP.
Looking at the economic drivers, China has the single largest market in the world – 1.4 billion people who (for the most part) speak the same language and have similar habits, making it a homogenous environment. Within this, there are more than 300 million millennials – the new generation who are very active consumers – further boosting growth.
Middle-class spending growth is also very impressive, with China’s total retail sales forecast to surpass those of the US next year. This consumption accounts for more than 50% of the Chinese GDP.
Innovation is being led by 5G broadband technology, which is the infrastructure of the future. China has granted 6,234 5G patents, compared with the 2,391 5G patents declared in the US. And China continues to power ahead in future infrastructure innovation, with 70% of 5G base stations globally.
China has the largest number of small and medium-sized enterprises in the world, totalling approximately 30 million and contributing roughly 50% of its local tax revenue and 60% of its GDP.
All these factors give China quality growth, which we expect will be very sustainable. This means less attention now needs to be paid to quantity as part of its ongoing economic expansion.
Local before global
Fuelling further local momentum, more Chinese companies are choosing the domestic stock market for their IPO listings. In 2020, there were 392 domestic IPOs versus 140 overseas IPOs of Chinese companies.
The IPO process is now the preferred exit route for PE-backed Chinese companies, with 90% of PE exits done via IPO – of which more than 65% are PE-backed. This is significant, because Chinese companies now account for almost half of global IPOs worldwide.
Better access for offshore investors
Despite having the second largest PE market worldwide and a 16% share of global GDP, China is still underrepresented in many international investors’ portfolios.
To encourage offshore investment in the domestic market, more industries are opening to foreign investors. This comes as ownership restrictions in certain sectors are reduced and cross-border capital flow restrictions are better managed using initiatives such as the Qualified Foreign Limited Partnership, StockConnect and RMB Qualified Foreign Institutional Investor programs.
Growth in domestic PE investors is leading to a broader, more developed, quality-driven local private equity industry in China, making it increasingly attractive for international investors to access.
¹Schroders Private Assets Virtual Seminar, Private Equity presentation, slide 11. March 2021
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