Chinese insurance firms, often a reliable source of capital for private equity managers, are increasingly bidding against general partners for deals, adding to already-fierce competition, said delegates at the HKVCA China Private Equity Summit in Hong Kong on Friday.
What’s more, insurers have lower return expectations than GPs, which could help insurers win some deals, said Zhao Yan, Shanghai-based managing director of Citic Capital Partners, on the sidelines of the event. Insurers would be happy with annualised returns of 8%, but GPs aim for at least 20%, he told AsianInvestor.
Now that insurers are more aware of GPs’ deal pipelines, the more mature players can invest in some of the projects by themselves, Zhao said, and sometimes even the same deals.
"Too much liquidity"?
The level of competition for Chinese assets has soared in recent years, say PE managers. “For every deal, you can see 20 term sheets bidding for it,” said Min Lin, founding partner of Hong Kong-based NewQuest Capital Partners, speaking on the same panel as Zhao.
Others echoed this view. “The market has too much liquidity and too many sources of capital [chasing deals], like insurance companies, real estate firms and banks’ wealth management products," said Steve Sun, Hong Kong-based partner and managing director at US PE firm TPG, speaking on the same panel.
This has led to rising tensions between some LPs and GPs, according to industry observers. Sophisticated pension funds, such as Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan have been building their in-house expertise – and allocations – to Asian private equity for some time, and a growing number of the region’s institutions look to be doing the same.
China’s two biggest life insurance firms reflect the trend. In March, China Life said it saw increasing exposure to alternatives and non-standard assets as key to boosting returns. And Ping An Life sharply increased its allocation to equity in infrastructure projects and non-listed investments by 0.8% to 1.9% during last year.
However, Frank Yang, founder and chief executive of Shenzhen-based Blue Ocean Capital, told AsianInvestor he saw the growing competition for PE assets as a natural evolution of the market, from allocating to funds, to co-investing with GPs, to striking their own deals.
Sectors in focus
So where is the money heading?
Yang said insurers were particularly keen to invest in sectors related to their business, such as healthcare, currently one of the most sought-after sectors in China. Generally, valuation of healthcare companies is higher in greater China than elsewhere, he added, reflecting the faster growth expected of mainland businesses.
Eric Mason, Hong Kong-based managing director of Asia investments for the New York-based Church Pension Fund, confirmed that healthcare would be his mainland sector of choice right now.
Other popular areas include consumer, education and TMT (technology, media and telecoms), agreed panelists. Valuations in such hotspots are high, with some pre-IPO deals reaching 25 times Ebitda, Zhao said. It’s not clear whether such assets have peaked in value, he added.
Zhao highlighted two other important trends in Chinese private equity: multinational corporations selling off businesses on the mainland, and outbound investment by Chinese firms. Many Japanese and US companies are divesting their overseas portfolios, providing opportunities for Chinese buyout funds, he told AsianInvestor.
When it comes to making outbound investment, Chinese companies are constrained by capital controls at present. It is difficult for them to convert large amounts of renminbi into dollars to fund outbound deals, noted Zhao, so they are increasingly seeking partnerships with dollar-denominated cross-border buyout funds to jointly bid for deals.