Facing Chinese Boom, PE Pros Preach Caution

As the influx of China’s companies to American exchanges continues to boost valuations in the East’s top growing economy, PE dealmakers still approach Asian investment opportunities with trepidation, citing the old axiom that there is too much money chasing too few deals.

“China is a place we’re getting to know,” Apollo Global Management Founder and CEO Leon Black told the Harvard Business School’s 17th Annual Venture Capital and Private Equity event attendees in its keynote address, adding, later, “tread carefully.”

The growth of China’s economy makes it difficult to restrain optimism. Already a rapidly developing consumer economy, a third of China’s 500 million Internet users only came online within the last three months, according to Venture Capital Journal.

“China’s Internet user base is larger than the U.S.’,” Richmond Global Managing Director Andras Forgacs said in a separate conference panel. “We’re extremely bullish on this sector.”

As the Chinese tech and Internet industry continues to blossom, companies look to globalize with American listings and Western acquisitions, said JC Asia Alpha Private Equity Founder and Managing Partner James Hahn. He predicted the flow of listings from East to West would continue, something that could buoy both VC and PE investors’ exit expectations. Recently, the pace of IPOs has quickened not just in the U.S., but worldwide. In the fourth quarter of 2010, 17 Chinese companies went public in the U.S., many of them tech-focused, representing more than half of the year’s IPOs on American exchanges for China. Now, investment banks are increasingly lining up IPOs in China rather in the U.S. as global markets are eager to list new companies, particularly Chinese ones.

Even as the market comes to a froth, U.S. investors will face challenges from a growing channel of capital being invested in the East, by the East, Hahn said. He said that of the Asian funds that have been recently raised, more than half of the capital comes from Chinese limited partners. Many U.S. investors have already underperformed in China, Hahn said, and private equity firms and VCs alike have faced lackluster returns from 2005 through 2010.

“The biggest challenge in China is the money that is already there,” he told panel attendees, adding, “we’re still in the first inning.”

However, Hahn’s and Black’s statements reflect mounting concern among private equity professionals that Asia is getting oversubscribed. According to the Coller Capital’s Global Private Equity Barometer published last month, about two-thirds of respondents said investors’ eagerness to invest in China and Asia is creating too much opportunity for inexperienced GPs.