Mid-East wealth funds to play growing role in China PE deals

Middle East asset owners are expected to be significant drivers of Chinese private market growth. Meanwhile South and Southeast Asia, along with Japan, could see a rise in M&A activity, according to a recent report.
Mid-East wealth funds to play growing role in China PE deals

After a relatively quiet 2023, private equity mergers and acquisitions (M&As) are set for a rebound, driven by appetite in South, Southeast Asia and Japan markets, while China could increasingly rely on Middle Eastern capital.

Due to potentially lower interest rates, high volume of dry powder on the private equity and debt fund side, and the return of bank risk appetite will lead to a significant increase in M&A activity in 2024 in select regions, according to law firm Morrison Foerster’s annual Global Private Equity Trends report.

While geopolitical tensions and macroeconomic concerns have made some Western-based asset owners and fund managers to roll back their appetite in Chinese private equity, activity in the China private equity market will rely on capital flows from especially Middle East and to some extent Singapore.

Marcia Ellis,
Morrison Foerster

Middle Eastern sovereign wealth funds (SWFs) have considerably increased the amount of their investments in Greater China – from $100 million in 2022 to $2.3 billion in 2023, according to Marcia Ellis, partner and global co-chair of private equity practice at Morrison Foerster.

But whether they will be able to fill the void created by the increasing unwillingness of US and European investors to invest in China is still to be seen.

“While some of that unwillingness results from the political tensions between the West and China, it also stems from concerns about the health of the market in China and hurdles that the Chinese government has imposed on exits," Ellis, based in Hong Kong, told AsianInvestor.

"These market and regulatory related concerns impact Middle Eastern investors as much as they do those from the West,” she said.


While Middle Eastern SWFs could benefit from lower competition from Western capital in China, the biggest current issue with respect to valuations is the stubborn resistance of founders of non-listed companies to repricing, as they continue to hope and believe that market conditions will soon improve, Ellis said.

As a result, sponsors are seeing the biggest opportunities in take-privates of listed companies, where repricing has already occurred, she said.

“It would be interesting to see a Middle Eastern SWF leading a take-private of a US-listed, China-headquartered company, but I don’t think they have developed the level of deep market knowledge necessary to take on the complexity that such a deal would entail,” Ellis said.

Therefore, the global private equity co-chair believes that in many cases it is more likely to see Middle Eastern SWFs basing the case for their investments on policy themes – such as a focus on emerging technologies and energy transition – rather than “mere economic considerations”. 


While some Western private equity capital is shunning the Chinese market, other markets in Asia might benefit.

While emerging economies in South and Southeast Asia will continue to offer attractive opportunities in the region, the Morrison Foerster outlook also mentions Japan where the government is pushing a revamp of the asset management industry and the corporate landscape in general.

Randy Laxer,
Morrison Foerster

While investors look to wrestle with political stability and national security related concerns, in other parts of Asia including China, investors are increasingly look to Japan as an attractive market for investment, according to Randy Laxer, partner and co-head of Morrison Foerster’s Asia private equity practice.

In addition to geopolitical concerns, this trend has been driven in part by the strength of the US dollar compared to the Japanese yen and low corporate valuations, Laxer, who is based in Tokyo, explained.

“Also, the barriers to entry for PE funds into the Japan market are lower than many other Asian countries. While Japan does have a national security-focussed FDI review process – similar to CFIUS in the US – unlike some countries, there is no legislation in Japan that flatly prohibits foreign investment in Japanese companies, real estate or other assets,” he told AsianInvestor.

Due to these factors and others, funds created for investing in Japan are growing, with several major international PE sponsors launching new funds specializing in Japanese investments and expanding their existing operations and fundraising activities in Japan.

“In particular, a number of large US, European and Asian-based PE funds have announced team buildouts, office openings and plans for full-scale entry into Japan in the past year, demonstrating that the Japan PE market is currently well positioned to attract foreign capital,” Laxer said.

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