The Road To China

European fund investors – or limited partners – are increasingly turning to the emerging markets of China, according to a new survey from Epiven, which found that 79% are experiencing increased exposure, with 52% already having some allocation to China and 88% expecting their allocation to increase.

Global or western private equity firms managing China-focused funds garnered the most attention, with 70% of respondents, but there was also interest in less direct routes: approximately 62% said that they would be willing to allocate more to private equity funds housing portfolio companies active in China.

However, the same number – 62% – cite finding the right private equity house as the greatest barrier to increasing their direct investment in China. The preferred means of meeting private equity firms – or general partners – was via referral from a trusted partner, according to 71% of respondents.

Further cause for caution includes lack of or little knowledge of key issues such as industry developments, access to private equity returns, track records and historical returns, and key people and events.

Risk areas were unclear or uneven regulation (90%), language and culture (42%) and profit repatriation (29%). In addition, 87% would be interested in buyouts, despite these representing only 6% of deal numbers and 17% of value.

A shift towards emerging markets has been ongoing with top tier private equity firms over the past few years, but has become even more apropos since the collapse of the credit markets (and therefore viable buyouts) last summer. China, in particular, has attracted attention as earnings growth has been substantial in the country, according to the survey, driving up opportunities for superior returns. Epiven said that the mean internal rate of return (IRR) for private equity in China in 2007 is 67%, close to double Europe’s 36%.

Firms to move into China in recent years include The Blackstone Group, Kohlberg Kravis Roberts, TPG Capital and in the UK, 3i and Candover.

This post first appeared at Thomson Merger News