Private Equity Firms Stuck in China Amid $1.5 Trillion Investment Frenzy: What’s Next?

Private Equity Firms in China Struggle to Offload Assets

Private equity firms in China amassed over $1.5 trillion in assets in the past 20 years, but now are facing challenges in offloading once-promising investments. With public markets offering unattractive valuations, buyout firms are exploring private sales, but secondary buyers are demanding discounts of 30% to more than 60% due to concerns about investing risks in mainland China. European and US haircuts are closer to 15%.

Many firms are considering putting off sales by setting up continuation funds to take over holdings for several more years, but that strategy is also proving to be challenging. This lack of easy exits has transformed China from a vast frontier for buyouts into a challenging landscape for long-term investing.

PAG and Carlyle Group Inc., among other firms, are struggling to arrange sales due to unfavorable market conditions. Some transactions may proceed under the right conditions, but the fundraising slump and difficulties with valuations and exits have led to a significant increase in dry powder in the industry.

While the challenges in China persist, some investors believe that the best companies are built in tough times. Hillhouse, a prominent Asia-based firm, is gauging international investor interest for a multibillion-dollar fund to buy beaten-down Chinese firms. Other private equity firms have also explored potential acquisitions of Chinese companies. However, pessimism continues to affect the conversation, with fundraising still tight and uncertainties regarding the future landscape for investing in mainland China.

Overall, amid uncertainties, fluctuations, and challenges, private equity firms are struggling to navigate the current investment landscape in China.

©2023 Bloomberg L.P.


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