The cloudiness over investor sentiment in China has not completely cleared. The country endured another year of headwinds, with a paradigm shift taking the private equity industry by storm.
China’s ecosystem is still reeling from the ripple effects of US dollar investors recoiling from committing capital to Chinese general partners (GPs), or fund managers, and firms. Investors in the country will need to keep updating their playbook as a recovery seems slow and far-off at this moment.
The country’s underperformance in recent years is also seen to be dragging down fundraising in the Asia Pacific region, which has bottomed out, according to a recent Preqin report. Investor confidence towards China is still expected to continue to weigh on its overall fundraising.
In the coming year, GPs and limited partners (LPs) active in China are expected to build on several strategies and trends that shaped its landscape in 2024.
1. ‘China plus one’ strategy to drive investor sentiment
PE in China has faced significant challenges in recent years, including stagnant economic growth, geopolitical tensions, a property crisis, and low consumer confidence. The additional burden of geopolitical uncertainties and additional tariffs loom amidst Donald Trump’s return to the White House, which could further prop up the ‘China plus one’ strategy among more investors.
Investment firms have had to change the way they do business in the country. Those who are bullish have continued to double down but with caution and a higher bar for both funds and direct investments. Others who have been a little more bearish have cut allocations and taken that capital to regions, such as Japan and India, that tell a more promising growth story and can offset the sluggishness from China.
North America- and Europe-based PE firms will likely cut down their China exposure.
In 2025, it remains likely that North America- and Europe-headquartered PE firms will continue to cut down on their China exposure. GPs and LPs alike will be in search of alpha in the thick of market volatility for better-than-average returns on their portfolios.
2. GPs look abroad for growth opportunities
In 2025, Chinese GPs will continue to sharpen their focus on global strategies for diversified deal exposure. Several GPs DealStreetAsia spoke to said they were doing more deals outside of China.
This could be seen as an effort to combat a lack of high-growth homegrown options which is pushing fund managers to look overseas for investments, especially as they become more conservative in their approach.
Longer fundraising timelines and smaller pools of capital to deploy from have been the norm over the last two years, which is putting more pressure on where the money ends up and subsequent investment returns.
Last month, a Financial Times report revealed that HongShan Capital Group had accelerated its push for global deals after the investment firm’s LPs shared frustrations over the pace of dealmaking from its $9 billion fund that was raised over two years ago.
3. It’s a buyers’ market
While some may be treading cautiously, others are seeing the current economic environment as a good buying opportunity in China, particularly PE firms that are headquartered in Asia with a China focus or nexus that don’t have to deal with the fallouts from geopolitical disruptions.
“When people say the US is not investing in China, it is not true, I would say,” said Gary Hui, senior vice president and head of the Hong Kong office at Wilshire at DealStreetAsia’s Asia PE-VC Summit 2024.
Some investors are cashing in on the market to invest in companies at a significantly lower valuation, especially as the market cools and competition fades.
“It’s a great opportunity to take advantage of this market dislocation opportunity, and this could be a pretty attractive investment vintage,” said InnoVision Capital founder and CEO Lane Zhao.
4. Red hot for hard tech
Through the headwinds, investors remained confident in certain sectors in China. Semiconductors topped the charts as the most invested sector throughout the year, according to DealStreetAsia’s Greater China Deal Review report. The buzz around artificial intelligence (AI) and chips doesn’t seem like it’s going anywhere, anytime soon.
The buzz around AI and chips doesn’t seem like it’s going anywhere, anytime soon.
These opportunities are being captured by local, particularly government-backed, and regional players, as the US government moved to ban outbound investments in high-tech sectors, including AI and chips. However, some argue that the floor is still open to global investors.
“We’re still in an environment where the majority of the people in the LP landscape either do not know or don’t believe that there is a deep tech opportunity in China,” according to Rafael Ratzel, managing partner at TH Capital International.
5. Exit crunch may ease as IPOs in Hong Kong make a comeback
Listing on the stock market has historically been the single most important avenue for PE investment exits in China, and the nation’s stock slump has made it difficult for PE and VC firms to do just that. But investors may be in for a treat as Hong Kong’s stock market, a popular destination for Chinese companies, makes a long awaited bounce back and allows GPs to return some liquidity to their LPs.
After the country pledged to boost efforts to stabilise its stock and property market, plans for Hong Kong IPOs by mainland companies are coming in at a quicker pace, and this momentum is expected to buoy up the city’s stock market.
HongShan-backed Bubble tea giant Guming and autonomous driving firm Minieye Technology, backed by the likes of Cathay Capital and Nio Capital, are among those recently looking to list following stalled IPO plans.
Hong Kong’s connectivity with the Middle East is expected to help facilitate potential secondary listings from the region, according to KPMG forecasts. Besides, scrutiny of some Chinese companies listed in the US may also drive a lot of them back to the region to relist, industry experts told DealStreetAsia.
