Private equity firms are busy assessing opportunities in China amid the current market turmoil, following a strong year for exits and fundraising. Growing areas of focus for general partners include investing alongside state-owned enterprises and buying into e-commerce and robotics, as they seek to adapt to the fast-changing mainland market. 

“We try to brand ourselves as long-term patient money, but that shouldn’t be the case,” said Sun Chang, former Asia-Pacific chairman of US-based PE firm Warburg Pincus, at the Asia Private Equity Forum yesterday (January 20) in Hong Kong.

Given the speed of change in China, particularly due to internet and consumer trends, general partners need to be nimble and flexible, argued speakers.

For instance, Beijing-based Hony Capital has altered its investment approach, said managing director Yuan Bing, also speaking at the forum. Initially Hony’s core business model was to take control of local and provincial state-owned enterprises and turn them into privately owned firms, Yuan said. “This was a good strategy when the economy was growing at a double-digit rate.”

But as economic growth has slowed and companies face more competition both domestically and abroad, Hony has sought to partner SOEs on deals and help them ensure their acquisitions perform more efficiently.

For example, Hony is the second largest shareholder (after the Shanghai government) in state-owned Shanghai Jin Jiang International Hotels. The company is one of the country’s biggest hotel groups and bought France’s Louvre Hotels Group last year.

Hong Kong-based Baring Private Equity Asia (BPEA) has also been involved in several partnerships with mainland SOEs, said chief executive Jean Salata independently of the forum.

“[In China,] SOEs have a policy of bringing market-oriented investors – as they call them – into the company they invest in in a joint deal,” he told AsianInvestor. “It’s not because the SOE needs your money, but more to have an investor with money at risk in the same deal and to bring in international management expertise and practices.”

Salata cited BPEA’s purchase of a 40% stake in UK cereal maker Weetabix last year alongside controlling shareholder Bright Foods, a Chinese SOE, with a view to driving Weetabix’s expansion on the mainland. (A full interview with Salata will appear in the upcoming (February) issue of AsianInvestor magazine.)

Meanwhile, although overall growth is slowing, there are many dynamic industries in China, such as robotics, said Zhou Linlin, CEO and co-founder of Principle Capital, also at the forum. This sector benefits from the need for industrial upgrades and demographic changes in the country, he noted. “Everybody is looking to upgrade their products, processes and technologies.”

Another issue is that it has been very difficult for many manufacturers to find new labour, because young people prefer to work in technology and other ‘new economy’ companies than in factories. Hence manufacturers have started to replace humans with machines, Zhou said, as the cost of robots is falling, while human labour is getting more expensive.

E-commerce is another focus area for PE firms in China – many PE firms have put money into the sector. Warburg Pincus invested in mobile shopping platform Koudai in 2012, CDIB Capital International in offline-to-online furnishing company Meilele.com in 2013, and Hony and Principle have each invested in online travel services platforms in 2014, Tuniu and Ivyouquan respectively.

GPs have reason to be optimistic about mainland opportunities, as last year was a far better year for exits and fundraising there than 2014.

The number of exits by China-focused PE funds reached 3,057 in the first 11 months of 2015, 3.68 times the number for the whole of 2014, according to Chinese PE research firm Zero2IPO.

Meanwhile, the fundraising value for China-focused PE funds amounted to $111.75 billion in the period, surpassing $100 billion within one year for the first time. The internet sector attracted the most funding at $14.46 billion, followed by financials ($9.73 billion) and telecoms ($9.31 billion), Zero2IPO data shows.

But the coming year is likely to prove rather tougher. Fred Hu, chairman and CEO of Beijing-based Primavera Capital, said: “I anticipate 2016 will be a year of uncertainty in the Chinese economy and financial markets, and will pose considerable challenges for PE funds.”