China’s private equity investors benefited from the country’s swift action to contain the Covid-19 pandemic, enjoying a jump in investment value and deal numbers last year, according to global consultancy Bain & Co.
But the fund managers face an uphill battle to conclude more lucrative deals this year amid escalating competition.
“Higher selling prices of targeted firms are expected this year,” said Lucia Li, a partner with Bain said. “High-growth companies are actively chased by many funds, hence they are raising their valuations and prices.”
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In 2020, private equity funds in China sealed deals worth US$97 billion, up 40 per cent from a year earlier, Bain’s survey found. The total number of transactions climbed 53 per cent to 857.
Companies in the technology, media, telecoms and health care sectors with both solid earnings and high growth potential were the primary targets of the cash-rich investors.
The figures in Bain’s report included deals conducted in Hong Kong and Taiwan as well as mainland China.
Bain said a strong recovery of private equity deals in China began in the second quarter of last year when the mainland emerged from the coronavirus outbreak to become the lone bright spot of the global economy.
China dominated the Asia-Pacific private equity landscape.
Its transaction value accounted for 53 per cent of the total deals signed across the region in 2020, which included Japan, South Korea, Australia, New Zealand and the Southeast Asian nations.
“Throughout the first few months of 2021, investors have been increasingly optimistic about the China private equity space, and we expect an upwards momentum to continue,” said Zhou Hao, another Bain partner.
He said an active initial public offering (IPO) market in Hong Kong has also fuelled private equity investment in China.
China’s economic output expanded 2.3 per cent in 2020, albeit with a contraction of 6.8 per cent in the first quarter when lockdown measures disrupted manufacturing and commercial activities.
But high-quality assets are chased by so many funds that their valuations are driven up.
In 2020, the enterprise value of the concluded deals represented 17.9 times their earnings before income tax, depreciation and amortisation (Ebitda), compared to the multiple of 15.3 in the previous year, Bain said.
The Bain survey found that 68 per cent of private equity investors in China picked high selling prices of the assets as their key concern this year.
Geopolitical risks, Covid-19 impact and lack of deal opportunities were among among their other worries.
Investment into the environmental, social and governance (ESG) space grew rapidly, buoyed by evidence that ESG-focused deals generated higher returns, Bain said.
About half of the private equity investors in China are actively seeking investments in ESG-related area, and 70 per cent of due diligence now includes an ESG component, the survey showed.
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