Monday 13 October 2008

Investors Harbour High Hopes for Private Equity Deals

Investors are confident the mainland’s private equity market will expand over the next 12 months even as volatility batters the financial system, according to a Deloitte survey.
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Guanyu said...

Investors Harbour High Hopes for Private Equity Deals

Nick Westra and Tim LeeMaster
13 October 2008

Investors are confident the mainland’s private equity market will expand over the next 12 months even as volatility batters the financial system, according to a Deloitte survey.

Citing the resilient domestic economy and ample capital levels as key market drivers, 87 per cent of participants in the survey conducted last month expected that overall levels of investment activity in the private equity market would increase or at least stay the same for the next year.

And 60 per cent expected average deal sizes will increase as the market becomes more mature.

“Anybody who has been in the private equity game for any amount of time knows that it is in times of turmoil and market anxiety that private equity does well,” said Chris Cooper, the head of China private equity at Deloitte.

“This is certainly a time when we as a firm have placed our bets on the importance of private equity in China and Hong Kong.”

The private equity market is expected to get a boost after the credit crisis dried up other avenues for raising cash such as initial public offerings and debt financing.

However, many investors have also been wary of entering the financial markets, preferring to hold larger cash positions.

“Buyers and sellers are taking a breather right now, given the current market situation,” Mr Cooper said. “And they will work through it.”

A breakthrough may be on the horizon after news surfaced late last week that private equity giant Blackstone Group was close to finalising an acquisition stake in China National BlueStar Group, which focuses on chemical products.

The deal could be worth as much as US$600 million, according to a Bloomberg report.

The Deloitte survey also highlighted growing competition in the mainland private equity market as it expanded. Citing a proliferation of market participants and regulatory controls on foreign players, 73 per cent of respondents expected competition levels to increase.

“International funds and local funds will begin to compete more and more for the same deals, for the same resources, and for the same advisers,” Mr Cooper said. “But that will both increase deal volume and most likely increase the size of deals.”

Growing competition for deals may not only enlarge the private equity market, but it could also signal a growing understanding and acceptance of the new market.

“We’re spending increasing amounts of time in second and third-tier cities but having to sell the private equity story less because entrepreneurs have seen several deals succeed,” said Anna Cheung, the northeast Asia partner at private equity fund 3i of Britain.

While the private equity market may be growing across the border, investors are hoping that it will move in more than just one direction.

Ninety per cent of respondents in the survey expected growth equity to be the most popular type of transaction in the mainland market over the next 12 months.

Pre-initial public offering and buyout deals scored with just 3 per cent of respondents apiece.

“We’re primarily involved in growth capital deals but as other product classes grow we will go into them as well,” Ms Cheung said.

In a time of uncertainty in the global financial markets, investors can at least take solace in the mainland’s abundant growth equity opportunities.

“There is enough growth equity opportunity in China to supply everybody with deal flow for a long, long time,” Mr Cooper said. “Nobody would bet against growth equity at this point.”