Not only is China a top destination for private equity (PE) capital, but this investment has had a positive economic and social impact, according to a survey* published on Friday by the European Union Chamber of Commerce in China and US business consultancy Bain & Company.
PE, both foreign and domestic, has helped drive improvements in companies' financial performance, social outcomes and company governance, finds the study, the first of its kind to be conducted in China and which covers the period between 2002 to 2008.
The economic impact of PE on China stands out in three areas. First, PE-backed companies in China achieved 3% higher revenue growth than their publicly listed counterparts. They also posted a 39% average increase in profits compounded annually, 14 percentage points higher than the 25% average increase reported by publicly listed companies. This is the result of benefits such as new management practices, better financial controls, improved brand development and enhanced corporate governance.
A second economic benefit is that PE-backed companies generate higher tax payments; these payments have grown at an annual compound rate of 28%, 10 percentage points higher than their benchmark peers. This is despite the fact that many PE-backed companies enjoy favourable tax rates due to their status as technology companies or as businesses with foreign investors. Hence, the higher payments suggest PE shareholders bring improved corporate governance with regard to the disclosure of taxable income.
Finally, PE-financed firms support the expansion of China's domestic consumer goods and retail industry. Since 2002, PE investments in this sector have grown at a 77% compound annual rate. Retailers backed by PE investors booked sales growth of 47%, compared with 16% for listed companies.
As for PE's social impact on China, it is notable in three principal areas, according to the survey. First, PE-backed companies created more jobs and paid higher wages and salaries. Total employment at private equity-financed companies increased by 16%, compared with 8% at publicly listed companies. In addition, the gross salary growth rates at PE-backed companies outperformed those at listed companies by seven percentage points.
The second area to benefit is that of spending on research and development. Measured as a percentage of revenue, R&D spending at PE-backed companies was more than two-and-a-half times that at listed firms.
The third main social impact is that PE is a strong contributor to the government's 'go west' policies. Not confined to the coastal regions that have attracted disproportionate investment capital, private equity is flowing across all provinces. The survey found that 42% of PE goes into companies headquartered in inland provinces.
Meanwhile, China's position as a PE destination looks set to strengthen, says the survey. From 2000 to 2007, PE deals in China grew at a compound annual rate of 45%, and even during the financial crisis, PE activity in China remained strong relative to other Asian markets. Deal volume topped $7.2 billion in the first half of 2009, nearly matching the total for all of 2008.
And the potential for further growth appears substantial, given that PE investments in mainland China represent 0.17% of GDP, as against the European level of 0.47% and 1.3% in the US.
The survey notes several evolving trends that could affect China's private equity industry, including: the introduction of renminbi-denominated funds; the closer alignment of domestic regulations with international principles; collaboration with global funds to diversify portfolios; the introduction of industry best practices for limited partners and general partners operating in China; and higher levels of participation by domestic institutional investors and funds of funds investing in private equity.
Covering the period from 2002 to 2008, the survey covered 100 companies representing more than 50% of all private equity investments through 2006. It excluded deals completed after 2006, to be able to track post-investment performance for at least two years. The survey also incorporated 17 in-depth interviews with PE-backed company executives. Bain & Co compared the PE-backed companies that received private equity investments against 2,424 publicly listed companies with major operations in China.
*The Social and Economic Impact of Private Equity in China -- 2009 Survey, available here.