The combination of an influx of PE capital over the last decade and what is currently the most generous IPO pipeline in years has generated returns all over China—for investors, the government, and its citizens, according to the Bain & Co. and European Chamber 2012 report measuring private equity’s impact with the help of executives in the region.
The capital injection so badly needed by many developing companies in China gives them a boost over competitors, the report said, and even though market cycle has the greatest impact on exit timing, favorable market conditions are helping more Chinese companies go public in as little as two years. Another potential long-term condition is whether Chinese companies suffer in the wake of a spate of bad press and accounting fraud a few firms endured–although the report did not center in on this factor.
Wages being paid out by private equity firms have driven up average salaries, the report stated, and China continues to lead Asia as private equity firms’ preferred destination for investment. As capital continues to flood the region and wages continue to rise, surrounding nations may find themselves positioned to compete for corporate mandates.
So what is so attractive about China? The report acknowledges: it is more of a VC scene, than anything else. China’s growing economy has created scale opportunities for entrepreneurs and investors alike primarily dependent on financing. The report noted a correlation between bullish global economic prospects and investments being made in inland China. How companies perform, and raise capital, in inland China during a down market could challenge private equity firms that overreached when making commitments.
Portfolio executives surveyed said overwhelmingly (72%) that PE investors are less focused on compliance issues than on value-adding initiatives. This may have rubbed off on China pros’ assessment of their backers’ overall utility: while most said that sponsors heightened their senses of brand awareness and improved financial advice, they were reluctant to admit their backers provided as much operational expertise.
If the Chinese government’s increasing willingness to allow private equity investment in the country was geared toward shoring up its tax base, financial sponsors should expect to get more welcome mats in the future. The report stated that companies receiving investment from financial sponsors as recently as 2008 were generating tax payments greater than that of their peers.
PE firms are specifically driving growth in the consumer and retail industries, according to the report. The study compared nearly 3,000 listed firms as a benchmark against private equity-backed companies.