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HOME > PAST ISSUE > TALKING POINTDecember 2006
Chinese private equity is starting to catch up with the foreign variety
Domestic Chinese money is beginning to leave its footsteps on ground
first trod by structured private equity and venture capital investors.
Foreign generated and managed funds still account for the vast majority of the private equity and venture capital investments in China but domestic funds are starting to come into their own.
Figures from Thomson Financial say that in 2004 foreign funds made up 97.4% of private equity money in China. In 2005 the number declined to 95.2%.
Leading the domestic advance are home-grown players like Citic Securities and CDH Investments. CDH, whose first fund came to around US$100 million, kicked off fundraising for a US$310 million fund in 2005 and is currently targeting a new fund of more than US$1 billion.
"There is no reason why [country funds] can't compete with the global players in the home market," said Gavin Geminder, a partner at professional services firm KPMG in China and Hong Kong SAR.
The good news is that there is no shortage of cash in circulation. It is difficult to figure out exactly how much money may be floating around in China.
A Beijing-based private equity fund manager who asked not to be named said deals have traditionally been funded through angels or other types of informal lending that aren't officially recorded.
"Rich people will support companies they like the look of without necessarily demanding that it goes through all the hoops that private equity firms would want," he said, recalling how the head of a manufacturing firm invested in a hotel simply so he could take his clients and friends there.
"They are almost lifestyle assets rather than an investment in a business."
According to a recent study, US$91.42-100.79 billion made its way to the nation's entrepreneurs in 2003 through such informal lending, equivalent to 28% of total lending by formal financial institutions.
Chinese people are famously thrifty, with bank deposits said to total US$4.15 trillion, or about 175% of GDP. As bank deposits generate poor returns, this represents a sizeable pool of funds that could enter high-return structured funds.
But even though the domestic funds are on the rise, foreign money is still more attractive to Chinese businesses - it offers foreign expertise, access to offshore markets and huge potential brand exposure.
For that reason, a lot of domestic firms keep a low profile, sticking to early stage deals and using local knowledge to get a jump on their foreign competitors. By contrast, foreign funds can become swamped when the rumour mill gets to work.
"Management teams often want to work with foreign investment teams," said one foreign venture capitalist. "Once the word gets out, the foreign investment teams find out its pretty easy for us to talk to the management team and find a deal."
Foreign generated and managed funds still account for the vast majority of the private equity and venture capital investments in China but domestic funds are starting to come into their own.
Figures from Thomson Financial say that in 2004 foreign funds made up 97.4% of private equity money in China. In 2005 the number declined to 95.2%.
Leading the domestic advance are home-grown players like Citic Securities and CDH Investments. CDH, whose first fund came to around US$100 million, kicked off fundraising for a US$310 million fund in 2005 and is currently targeting a new fund of more than US$1 billion.
"There is no reason why [country funds] can't compete with the global players in the home market," said Gavin Geminder, a partner at professional services firm KPMG in China and Hong Kong SAR.
The good news is that there is no shortage of cash in circulation. It is difficult to figure out exactly how much money may be floating around in China.
A Beijing-based private equity fund manager who asked not to be named said deals have traditionally been funded through angels or other types of informal lending that aren't officially recorded.
Indulgent investment
"Rich people will support companies they like the look of without necessarily demanding that it goes through all the hoops that private equity firms would want," he said, recalling how the head of a manufacturing firm invested in a hotel simply so he could take his clients and friends there.
"They are almost lifestyle assets rather than an investment in a business."
According to a recent study, US$91.42-100.79 billion made its way to the nation's entrepreneurs in 2003 through such informal lending, equivalent to 28% of total lending by formal financial institutions.
Chinese people are famously thrifty, with bank deposits said to total US$4.15 trillion, or about 175% of GDP. As bank deposits generate poor returns, this represents a sizeable pool of funds that could enter high-return structured funds.
But even though the domestic funds are on the rise, foreign money is still more attractive to Chinese businesses - it offers foreign expertise, access to offshore markets and huge potential brand exposure.
For that reason, a lot of domestic firms keep a low profile, sticking to early stage deals and using local knowledge to get a jump on their foreign competitors. By contrast, foreign funds can become swamped when the rumour mill gets to work.
"Management teams often want to work with foreign investment teams," said one foreign venture capitalist. "Once the word gets out, the foreign investment teams find out its pretty easy for us to talk to the management team and find a deal."
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