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China’s Private Equity Posts Another Strong Growth

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February 13, 2017

China’s private equity sector has posted another strong month. The total assets under management increased from RMB750 billion (USD109 billion) to RMB10.98 trillion (USD1.58 trillion) in January. China’s official Xinhua news agency also reported the number of big PE firms reached 147. These are firms with assets of minimum RMB10 billion (USD1.4 billion).

 

Despite the strong growth in the PE sector, China’s foreign exchange reserves shrank for the seventh month in a row. January saw FOREX reserves only at USD2.99 trillion, down from the USD3.01trillion at the end of December.

 

In terms of attractiveness, China’s healthcare industry continues to be a big draw for PE firms. Private hospitals and drug companies have caught the attention of investors, with the rising income levels and the aging population creating demand for the industry. Consulting firm McKinsey & Company has predicted the healthcare sector in China to grow to a USD1 trillion industry by 2020.

 

Interest in the region from international PE firms remains strong. Standard Chartered Private Equity acquired a Chinese beauty care provider in a leveraged buy-out transaction at the start of February.

 

Big role in boosting SME activity

 

The official data shows show the Asian country now has 18,000 officially registered private equity firms. These firms employ over 280,000 people and manage around 47,500 funds. The PE sector is slowly growing into an important part of the Chinese economy.

 

Furthermore, the importance of the sector is crucial for small and medium-sized enterprises (SMEs). The SMEs have previously suffered from the lack of funding , with the private equity sector now helping to turn things around. The Chinese government has slowly began encouraging the alternative lending channels, including private equity, to ensure SMEs can continue to boost economic activity in the country.

 

Allowing more PE activity could help sort out some of the problems in the SME sector in China. The country’s enterprises have been suffering from the lack of funding and free market access. International Monetary Fund published a paper last October, which showed the existence of around 830 zombie companies in just a single province, Liaoning. These loss-making enterprises live on government subsidies and bank loans and often don’t have access to PE and debt restructuring.

 

Shen Meng, president of private investment bank Chanson & Company, commented on the Liaoning situation to Bloomberg saying, “Liaoning’s government and the people there dare not or would not like to solve its problems via the market”. Shen went on to state the problem in the country, and especially the province, continue to be around the pricing. “Some assets in Liaoning remain profitable for asset management companies or distressed debt funds,” Shen told Bloomberg.

 

China Daily predicts the increasing investor appetite will keep SMEs happy in the near future in terms of strong capital availability. The continued growth of the Chinese PE sector could mean SMEs don’t need to worry about lending problems this year. The ball, however, continues to remain in the corner of the government. The months ahead will show how committed the officials are for easing market access.

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