Private equity in China: five charts that show what investors could be missing

Growth projections for the coming decade still show the Chinese economy outstripping every developed market in the world. We believe the private equity market is compelling for investors looking to capitalise on this growth.

Here are five reasons why.

Figure 1: China’s PE fund raising accounts for a third of global PE fund raising

China is the world’s second largest private equity (PE) market and accounted for approximately one-third of global private equity fund raising in 2019.

But most investors allocate a small fraction of that to the market itself. China’s private market is significantly underrepresented in investors’ portfolios.

That looks set to change.  As Chinese financial markets open up, foreign investors are starting to seize upon  the many opportunities.

Figure 2: China is becoming increasingly accessible  

For example, figure 2 shows that in 2015, 17% of the country’s industries were either restricted or prohibited for foreign investors. In 2020, that figure has shrunk to a mere 6%.

In addition to the easing of ownership restrictions in certain industries, there are initiatives such as qualified foreign limited partnerships (QFLP). These are being introduced to manage cross-border capital flow restrictions.

QFLP is a particularly attractive way for foreigners to access the large and fast-growing RMB-denominated PE market (which is the dominant source of PE capital in China).

Figure 3: RMB funds now a dominant source of private equity capital

Traditionally foreign investors have gravitated towards USD-denominated funds that have been raised by foreign or domestic managers. But this market is dwarfed by the RMB market.

Figure 4: Number and proceeds from Great China IPOs much bigger than US

There is also an increasing range of exit options for Chinese PE companies. One common exit strategy is to take the company public by listing it on the stock market in an initial public offering (IPO). 

As the chart above shows, the number of IPOs in Greater China has grown by 48% between 2019 and 2020. Over the same period in the US, growth was more than half this. While the proceeds from these IPOs grew faster in the US than in China between 2019 and 2020, total proceeds are significantly higher in China.  

Figure 5: More Chinese companies are choosing domestic stock market for IPO listing

IPOs have become an established way for PE-backed Chinese firms to exit the private market, particularly because pre-profit companies are now allowed to list in China.

In fact, 90% of PE exits are via IPO which means Chinese companies now account for almost half of global IPOs worldwide (by number).

Within those IPOs by Chinese companies, a majority of them list in China and over 65% of those domestic IPOs are PE-backed. Chinese companies are those with headquarters or their main business in China.