The value of China's private equity deals reached a record high of $15.2 billion in 2011, a year in which domestic funds surpassed overseas peers for the first time to account for 60% of the 173 deals transacted, finds a new report by global consultancy Bain & Co.

Despite a slowdown in the mainland economy last year, deal values have been steadily rising over the past decade. In 2011 the average deal size was $88 million, compared with $72 million in 2010 (193 investments worth $13.9 billion) and only $40 million 2005, according to Bain’s 2012 China Private Equity Report.

The rise can partly be attributed to the fact that nearly half of last year's PE investments were in the high-value IT and financial services sectors. Deal volume is still down from a pre-crisis peak of 270 investments in 2007.

Despite China’s continued economic downturn this year, deal values are expected to rise further, with domestic firms retaining their dominance, says Vinit Bhatia, partner and head of Bain Greater China’s private equity practice.

About $82 billion in fresh capital is being raised for China deals by both domestic and overseas firms, Bain estimates. However, the bulk of the money is being drummed up by domestic PE firms, including Hony Capital and Citic Private Equity.

Renminbi-denominated funds accounted for 68% of the $32 billion raised for China deals in 2011, helped by the steadily growing number of RMB vehicles. It is a sharp contrast from the 5% that RMB funds contributed towards the $42 billion raised in 2007.  

Only local Chinese qualified investors can invest in RMB funds, which have drawn a growing proportion of high-net-worth individuals. This has led to concerns that HNW investors may take a short-term view on the asset class, thereby diluting the quality of the funds.

Bain has a positive outlook on the industry, noting that overseas PE funds – faced with growing competition from domestic firms – are expanding their China teams and the scope of deals they pursue. Foreign players are also putting more focus on improving the value of the companies in which they invest.

Since 2005, pre-IPO and mezzanine investments in China have decreased in proportion to the number of total deals. While growth capital dominates the investment landscape, buyouts are on the rise.

Last year there were 11 buyout deals, comprising 8% of total transactions, with an average deal size of $175 million. While buyouts still make up a relatively small share of China’s PE deals, they have doubled from 2010, when there were six buyouts with an average value of $130 million.

“We are seeing clear signs that China’s markets are maturing,” says Kiki Yang, Bain principal and report co-author.

However, Bain acknowledges that the continued entry of new players – which will take different investment approaches – is expected to lead to varied returns among PE funds in China, says Yang.