Investor flows into China PE set to grow, post-Covid

Global investor interest in Chinese buyout funds, in particular, is set to rise and co-investments also increasing, according to a new study by McKinsey.
Investor flows into China PE set to grow, post-Covid

Private equity funds in China will need to specialise more in order to hunt for strong returns instead of riding the gradually lessening wave of the country's economic growth, but international investor interest in putting capital to work in the sector looks set to remain strong, says McKinsey.

The US consultancy released a report today (August 28) predicting that private equity funds will need to sustain themselves better and to gain more internal expertise if they are to pinpoint Chinese companies that will outperform a generally slowing economy.

The country’s private equity industry is also maturing. From 2009 through 2019, fundraising for private equity firms operating in China grew at a compounded annual rate of 29%, the strongest growth among all major asset classes. McKinsey notes that China is the third-largest private equity market in the world: in 2019, private equity and venture capital funds deployed $66 billion of their funds in the country, compared to $71 billion in the UK and $471 billion in the US.

McKinsey noted that buyout fund growth, in particular, looks set increasingly to prosper, after initial years of mainly minority and venture capital fund growth.

Growth of alternative asset funds in China

“China has enjoyed 30 years of growth and economic performance; a large number of private companies are phenomenally run by entrepreneurs and they are reaching an age where they are thinking of future control and the structure of their companies,” said Ivo Naumann, a partner head of private equity practice at McKinsey, speaking on a media call.

Wouter Bann, an associate principal in McKinsey’s Beijing office, added that the rise in buyout funds is growing in tandem with an increasing focus on capital in the largest general partner funds investing in China.

“Increasingly, the top 20 funds are gathering more and a larger share of total LP (limited partner) capital,” Baan said. “In 2019, 30% of the total capital that was raised went to the top 10 funds, which is a significant increase versus five years ago (when 22% when to the top 10 funds).”

Increased concentration of fund-raising in large funds

In part, this is an indication of a more cautious mindset among asset owners. As Covid-19 struck, institutional investors have sought to invest in proven GPs, especially in emerging countries and China. That, however, is bad news for new and relatively unproven funds.


Neumann also noted that the complexity of funds is also increasing, adding when asked by AsianInvestor that this referred partly to a rise in co-investments by asset owners.

“Large LPs are certainly increasingly reserving and asking for co-investment rights, both investing as an LP into GPs and also having the right up to a certain amount of money to co-invest along certain deals. That allows GPs to do larger deals, and second LPs in many instances have different time horizons… as long-term investors, as part of the capital structure [of the targets].”

Complexity is also rising among the need to invest, particularly as both China’s economy and its private equity industry has expanded.

“The industry has grown tremendously and reached a certain level of maturity. When you talk to sovereign wealth funds and pension funds they speak of the highly maturing and increasing sophistication of GPs in the market and, in many cases, they are more comfortable to deploy more of their capital to such funds,” said Naumann.

He added that while some GPs are hiring their own specialists for investment teams, others are hiring senior executives that they are placing on the boards of their portfolio companies and relying on more external advisers.

“The GPs need to decide whether they want to stick with their model, or branch out and become multi-asset players into [areas like] private credit, real estate and infrastructure funds. I’d expect… more specialisation and more scale, as is happening elsewhere in the world.”

The sectors that look set to be of particular interest to private equity companies should come as no great surprise: companies that are disrupting across multiple industries through digitisation – something McKinsey thinks has been accelerated by the pandemic – plus healthcare and, increasingly, education companies.


The appeal of private equity in China faces a potential obstacle in the rise of US antipathy towards asset owners investing into Chinese public equities. The Trump administration most recently pressured US college endowments to pull such investments into the country. Naumann said, however, that while he is not a political expert, he does not think that this will greatly impact fund flows into Chinese private equity.

“China has moved from 13% to 20% of the world’s GDP and at some point, it will be close to one quarter,” he noted. “In many ways, these facts will continue to remain very strong reasons for any investor around the world to take a serious look to be exposed to this economy and opportunity.”

Naumann added that much of the interest among GPs is also on the domestically focused companies, rather than those that are export-reliant.  

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