Private equity investors are stuck in China as top companies fail to find exit deals

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The world’s largest private equity groups have been unable to sell or list their portfolio companies in China this year as Beijing cracks down on initial public offerings and an economic slowdown leaves foreign investors’ money trapped in the country.

Dealogic data shows that among the world’s 10 largest private equity groups operating in China, none of the Chinese companies have gone public this year or completely sold their stakes through mergers and acquisitions.

This is the first time this has happened in at least a decade, although the pace of exits has been slow since Beijing imposed restrictions on the ability of Chinese companies to list in 2021.

Buyout groups rely on the ability to sell or take companies public, often within three to five years of purchase, in order to generate returns for pension funds, insurance companies and other institutions where they manage money.

The difficulty of doing so effectively results in these investors’ funds being locked up and future returns uncertain.

“Private equity investors are increasingly aware that China may not be as systematic an investment as previously thought,” said Brock Silvers, chief executive of Kaiyuan Capital, a Hong Kong-based private equity group.

He said companies face “undermined exit strategies on multiple fronts” in China, including from an economic slowdown and domestic regulatory pressures.

As the world’s second-largest economy has grown rapidly over the past two decades, many private equity groups have expanded their presence in the economy. Global pension funds and other institutions have poured money into the country, hoping to benefit from its economic boom.

Dealogic data shows that these 10 companies invested US$137 billion in the past 10 years, but exited in total only US$38 billion. Since the start of 2022, new investment from these groups has plummeted to just $5 billion.

The pace of deal exits by global buyout groups is also slowing. According to a report from S&P Global, numbers fell 26% in the first half of this year.

But the stalling of China’s exit has been particularly stark. It has helped some pension funds that allocate cash to private equity groups become wary of investing in the country.

“Theoretically, you can buy it cheaply [in China] Now, but you need to ask what happens if you can’t exit, or you have to hold on longer,” said a private markets expert at a large pension fund that does not currently invest in the country.

A senior executive at a major investment group that has poured cash into private equity funds said they “don’t expect significant exits for at least the next few years.”

The data covers Blackstone, KKR, CVC, TPG, Warburg Pincus, Carlyle Group, Bain Capital, EQT, Advent Capital and Apollo, the 10 acquisition groups with the largest private equity financing funds in the past decade, excluding Those groups that did not conduct any transactions were in China. The data does not include Blackstone real estate transactions.

Private equity firms sometimes buy and sell companies without disclosing the information, and any such exits may be missed in the data. The companies declined to comment.

In addition to tense Sino-US relations and economic slowdown, difficulties in cashing out are also one of the main factors hindering international acquisition groups from investing in China.

Jean Salata, founder of Barings Private Equity Asia, which was acquired by Stockholm-based EQT in 2022, told the Financial Times in June that China One of the reasons deals have a “high barrier to entry” is that investors ask, “How easy is it to acquire this company?” How liquid will these investments be in five years?

Foreign buyout groups used to rely on listing Chinese companies in the U.S. or other countries to exit their investments after a few years. But since ride-hailing app Didi Chuxing launched its IPO in New York in 2021, Beijing has imposed new restrictions on overseas listings.

As of the end of November, the total number of domestic IPOs in China this year was only US$7 billion, compared with US$46 billion last year, which is the lowest total since 2019.

The crackdown has forced buyout groups to look for other options, such as selling their stakes to domestic and multinational companies and other buyout groups. But overseas buyers are sometimes reluctant, in part because of tighter U.S. political scrutiny of China itself.

Carlyle Group sold its minority stake in McDonald’s China business to the U.S. fast-food retailer last year, one of the few recent exits among the ten companies.

During China’s economic boom before the Covid-19 pandemic, dozens of companies exited through listings and mergers and acquisitions, while foreign private equity played a larger role in driving economic activity on the mainland.

Goldman Sachs Chief Executive David Solomon said at a Hong Kong conference in November that one of the reasons investors were “on the fence” about deploying funds in China was that “it’s very difficult…”. . . to obtain capital”.