Private equity investors trapped in China as top firms fail to find exit deals

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The world’s biggest private equity groups have been unable to sell or list their China-based portfolio companies this year, as Beijing’s crackdown on initial public offerings and a slowing economy keep foreign investors’ capital in the country.

Among the 10 largest worldwide Private equity There are no records of groups with operations in China listing any Chinese companies this year or selling their stakes entirely through M&A deals, figures from DiLogic show.

This is the first year in at least a decade where this has happened, although the pace of exits has slowed since Beijing introduced restrictions on the ability of Chinese firms to list in 2021.

Buyout groups rely on being able to sell or list companies to generate returns for pension funds, insurance companies and others whose money they manage, usually within three to five years of buying them.

D It’s hard to do In effect locking up those investors’ funds, future returns are uncertain.

“There is a growing sense among PE investors that China may not be as systematically investable as it once was,” said Brock Silvers, chief executive of Hong Kong private equity group Kaiyuan Capital.

He said companies faced “weak exit strategies on multiple fronts”. Chinaincluding being affected by a slowing economy and domestic regulatory pressures.

Many private equity groups have expanded their presence in the world’s second-largest economy as it has grown rapidly over the past two decades. Global pension funds and others have plowed capital into the country, hoping to gain exposure to its economic boom.

The 10 firms invested $137bn over the past decade, but total exits amounted to just $38bn, Dealogic data shows. New investments by these groups have fallen to $5 billion since the start of 2022.

The exit of buyout groups from global transactions has also slowed. It fell 26 percent in the first half of this year, according to a report by S&P Global.

But the slowdown in exits from China is particularly harsh. This has helped create some pension funds that allocate cash to private equity groups to gain exposure to the country.

“In theory, you can buy cheap [in China] But now you have to ask what if you can’t exit or if you have to hold it for a long time,” said a private market expert at a large pension fund that is not currently investing in the country.

A senior executive at a large investment group pouring cash into private equity funds said they “don’t expect many exits” in China, at least for the next few years.

The data covers Blackstone, KKR, CVC, TPG, Warburg Pincus, Carlyle Group, Bain Capital, EQT, Advent International and Apollo, the 10 largest buyout groups in China by funds raised for private equity over the past decade, excluding those that have not done a deal. Data does not include Blackstone real estate deals.

Private equity firms sometimes buy or sell companies without disclosing it, and any such exits may be missing from the data. The companies declined to comment.

Besides Sino-US tensions and the economic slowdown, one of the main factors deterring international buyout groups from investing in the country is the difficulty of cashing out.

Jean Salata, founder of Barings Private Equity Asia, which bought Stockholm-based EQT in 2022, told the Financial Times in June that one reason “Bar is high” for China deal What investors were asking: “How easy will it be to find liquidity in those investments five years from now?”

Foreign buyout groups used to rely on public takeovers of Chinese companies in the US or other countries to exit their investments after a few years. But Beijing has introduced new restrictions on offshore listings since cracking down on ride-hailing app DiDi in the run-up to its New York IPO in 2021. Listings have slowed significantly.

This year, there were just $7 billion in domestic IPOs in China as of the end of November, compared to last year’s $46 billion, which was already the lowest total since 2019.

The crackdown has left buyout groups looking for other options, such as selling their stakes to domestic and multinational companies and other buyout groups. But foreign buyers are sometimes reluctant, because of the close political scrutiny of the U.S. mainland.

One of the few recent exits among the 10 firms was when Carlyle sold its minority stake McDonald’s Chinese operations US fast-food retailers returned last year.

In China’s boom years before the Covid-19 pandemic, there were dozens of exits through both listings and mergers and acquisitions, and foreign private equity played a much larger role in driving mainland operations.

Goldman Sachs Chief Executive David Solomon told a conference in Hong Kong in November that investors had a reason “Mainly on the side“It was very difficult to deploy funds in China.” . . to raise capital.”