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July 21, 2008
Private Equity Funds in China -- Boom or Bust or Just Beginning?
One has heard of the promise of private equity investment in China at various times since the early 90s. What is really going on?
BusinessWeek, which curiously seems to mistitle its articles often, implies a boom. Shaun Rein's article implies great potential, but no boom yet. Adduced in favor of that proposition are the following:
...the continued optimism and growth of China's middle class in spite of inflation and the global downturn, the increasing global competitiveness of domestic Chinese firms that need expertise and capital to expand internationally, the tightening of credit from Chinese banks, and the decline of China's stock market.
Echoes of the past. Why is now any different?
Other observers are rather less positive, but seem to see a somewhat rosy future indicated by the defections of high-level Temasek and Goldman people, who have decided to set up their own shop, often in "cooperative" competition with their former employers.
One Beijing-based attorney put it to me this way (I'm paraphrasing here):
"Of 10 investments, nine will fail miserably, but one will make everything back and then some. Quite a lot more than then some. Everyone is chasing the 10th deal."
The investments to which he referred were, to most corporate investors, minor, each well under $10 million. But what about the big investments, which preoccupy the minds of private equity investors? Rick Carew writes:
Although smaller than the multibillion-dollar deals struck in North America and Europe, stakes in Chinese companies can be lucrative. A consortium led by Carlyle Group invested $740 million in China's third-largest life insurer, China Pacific Insurance (Group) Co., ahead of the insurer's IPO.
Post-IPO, the 17.3% stake is valued at around $4 billion, though the stock has declined this year alongside other China shares. Still, deals have been slow to come because of Beijing's worries about foreign capital and criticism that Western buyers got overly favorable terms for state assets.
China has withheld approval of a Carlyle deal to invest $375 million in a Chinese construction machinery company for three years. Carlyle has cut the size of its proposed stake repeatedly to get a deal done, to no avail.
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