Persistent challenges in China’s economy have spurred private equity firms to shift their investment strategy from favouring a single market to a more balanced exposure across the Asia-Pacific region.

The private equity market in China was quiet in 2023, and a rebound is not anticipated this year amid a sluggish economy, negative consumer sentiment, regulatory uncertainties, and turmoil in the property sector.

“Currently, there are literally no Chinese fund managers actively raising private capital,” a partner in one of the world’s largest alternative investment firms tells The Asset.

Since last year, capital-raising activities by private equity managers have been dominated by pan-regional funds such as Carlyle & Co., TPG, and CVC Partners, which have minimal exposure to Chinese equity.

Historically, these firms would allocate 20% to 40% of their funds to China. CVC Partners closed its sixth Asia fund in late February, raising US$6.8 billion.

Investor sentiment in Chinese capital markets has been bleak, as evidenced by a significant capital outflow in 2023. “If there are sustained strong equity markets on the public side for consecutive months, private investors might become more comfortable and start considering committing new capital,” the partner elaborates.

Secondary market opportunity

There are rising opportunities in the secondary market as the valuation of Chinese equities continues to decline. However, there has been a significant spread between bid and ask prices over the past 12 to 18 months, making it more challenging for private equity investors to exit compared to public investors due to lower market liquidity.

For instance, some buyers offered discounts of over 50% to acquire Chinese assets in 2023, but most sellers rejected such offers. As asset valuations continue to depreciate, sellers are starting to accept lower prices.

As such, the alternative investment executive believes that private equity activity in China this year will focus on the secondary market, rather than on the primary market.

Looking at other major markets in the region, the investment picture appears more upbeat. India has benefited from massive capital inflows, with the country’s stock market hitting record highs and its ambitious infrastructure programme attracting much interest. That being the case, the partner suggests, “It’s an opportune time for private equity firms to sell their Indian holdings”.

Comparatively, the Indian market is smaller than China’s, he notes. And private equity fund managers are seeking a more diversified exposure in the Asia-Pacific region. Markets such as Japan, Australia, and South Korea, which are more focused on buyouts with solid cash flows, help to balance the riskier nature of emerging markets like India and China.

The Japanese market is benefiting from low interest rates and the depreciation of the yen. Despite its slow GDP growth, its relatively stable political environment is bolstering investor confidence.