ChinaAn Overview of Trends in Select Sectors and Markets September 2009 Country Snapshot* nvestors continue to be extremely optimistic about China. The country’s growth story not only remains intact, but is also enabling China to ascend in the global eco- 2009 Population: 1.3 billion nomic order and lead other economies out of the financial crisis. China-focused I Population Growth (2009–2050): 8% private equity funds led the Emerging Asian region in 2008, with total funds raised of % of Population Under 15 Years-old (2009): 19% US$14.5 billion, an increase of 3.7x the amount raised in 2007. Investments in Chi- 2009 GDP: US$4.8 trillion na held steady at US$9 billion in 2008, from US$9.5 billion in 2007, making China 2009 GDP per Capita: US$3,622 home to the greatest amount of private equity investment dollars across the emerg- 2009 GDP Growth: 7.5% ing markets to date. As the effects of the global financial crisis have stalled private 2010 GDP Growth: 8.5% equity worldwide in 2009, China is among the few markets experiencing a relatively *All data projected. high degree of fundraising and investment activity, particularly as RMB-denominated Source: International Monetary Fund, Population Reference Bureau. funds are drawing greater investor interest, both at home and abroad. China is the only emerging market that compares in size to the U.S. and European private equity markets and, within Asia, it is on track to displace more developed private equity markets such as Japan and Australia for volume and investor attention. According to the 2009 EMPEA/Coller Capital Emerging Markets Private Equity Survey, investors have ranked China as the most attractive emerging market/region for private equity investment every year since 2004. Despite the fact that the country’s GDP has contracted sharply from the 13% growth rate it boasted in 2007, China’s economic engine continues to hum along and, of the world’s leading economies, is the only one currently expanding. The McKinsey Global Institute projects China’s urban middle class will increase from 43% of the popula- continued on page 2 China Private Equity Fundraising and Investment, 2005-H1 2009 (US$B) 15 $14.5 Fundraising 12 Investment $9.5 $9.0 9 $8.2 $6.5 US$ Billions 6 $4.3 $3.9 $3.0 $2.7 3 $2.2 0 2005 2006 2007 2008 H1 2009 Source: EMPEA. © 2009 Emerging Markets Private Equity Association 1 EMPEA Insight: China September 2009 tion today to 76% by 2025, or 612 million individuals. Ad- field Fund, which closed on its third China-focused vehicle ditionally, Chinese banks continue to lend and the country’s dedicated to technology investments at US$383 million in 4 trillion yuan (US$585 billion) stimulus plan, launched in early 2009. In September, Beijing-based CDH Investments, November 2008, has largely been viewed as successful thus a spin-off of China International Capital Corporation, raised far in its goal to ignite domestic demand and boost capital US$500 million for a first close on its fourth dollar-denom- spending. inated private equity fund, targeting US$1.4 billion in total commitments. China has traditionally been a difficult place for deals, but the landscape is changing. China’s challenges include unclear Local-currency denominated funds are not only grabbing rules and regulations for foreign investors regarding proce- headlines but are also comprising an increasing share of dures and taxation, but Chinese regulatory authorities seem capital being raised by both local and foreign players. RMB- committed to establishing a framework for private equity. A denominated funds accounted for almost half of all capital number of local and provincial government initiatives have raised in the first half of 2009. China-focused private equity been launched across the country, introducing incentives for firm New Horizon Capital is just one example, having closed foreign firms to establish wholly foreign owned and/or –in- its first RMB-denominated fund at RMB1 billion (US$146 mil- vested fund managers based in China, while the national gov- lion) in January 2009. In particular, government-backed in- ernment has signaled its intent to allow foreign firms to es- dustrial investment funds, designed to increase financing op- tablish local currency RMB-denominated funds via onshore tions for domestic companies, continue to account for a large vehicles. It remains to be seen how regulatory treatment percentage of local currency funds with approximately 15 of foreign investors will compare to that of wholly-domestic launched in the first six months of the year. During this time players and how transparent regulations will be. However, period, Zhongchuan Investment Fund Management’s Tian- with the government increasingly recognizing and promoting jin Ship Industry Investment Fund, targeting RMB20 billion private equity as a distinct asset class, China is poised to (US$2.9 billion), closed on RMB2.8 billion (US$410 million), continue to lead the emerging markets as the foremost des- while the Zhangjiang Biomedical Industrial Fund and the Bei- tination for both fundraising and investment. jing Zhongke Fangshan Venture Investment Fund closed on Fundraising Trends continued on page 3 EMPEA Insight Funds focused singularly on the Chinese market raised US$14.5 billion in 2008, representing 36% of the total capi- Editorial Director Jennifer Choi [email protected] tal raised by Emerging Asian funds and more than 20% of Writing and Research Nadiya Satyamurthy satyamurthyn@empea. all capital raised by emerging market funds during the year. net, Harrison Moskowitz [email protected], Scott Scheide [email protected] Fundraising for China slowed in the first half of 2009, with a Production Manager Cristiane Nascimento [email protected] 77% decrease in funds raised at US$2.7 billion, down from US$11.8 billion in the same period in 2008. However, China Advertising Opportunities continues to account for the greatest single-country share of EMPEA Insight offers readers an overview of the data and drivers emerging markets funds raised during this time period, rep- behind investment trends in emerging markets private equity. Each issue of EMPEA Insight provides an opportunity for a single resenting 31% of funds with closes by number. exclusive back page advertisement. Issue-specific placements are On average, fund sizes among closed funds were smaller in on a first come, first served basis. For a list of upcoming issues the first half of 2009 at US$77 million, versus US$379 mil- and more information about advertising opportunities and rates, contact Cristiane Nascimento at [email protected]. lion in the first half of 2008, when three funds closed above About EMPEA the US$1 billion mark by mid-year. Private equity firms that The Emerging Markets Private Equity Association is is a non-profit, witnessed sizable closes in the first half of 2009 include Chi- independent, global industry association that promotes greater na-focused CITIC Capital Partners, which held a first close on understanding of and a more favorable climate for private equity its second fund at US$500 million in March, and GSR Ven- and venture capital investing in the emerging markets of Africa, tures, a China-based partner of U.S. venture capital firm May- Asia, Europe, Latin America and the Middle East. 2 © 2009 Emerging Markets Private Equity Association September 2009 EMPEA Insight: China Limited Partners’ Planned Changes to Their EM PE Investment Strategy Over the Next 1-2 Years Investment Trends Representing the largest single-country share of all invest- ment dollars across the emerging markets, China was home Stay the same 80% to US$9 billion in investments in 2008, a 5% decrease from 70% Begin investing the US$9.5 it received in the previous year. Investments for the first half of 2009 totaled US$6.5 billion, accounting for 60% Expand investment 62% of capital disbursed by private equity investors in Asia 50% and making China the only BRIC country to experience year- 40% over-year growth in investment activity through mid-2009. % Respondents 30% For the first half of 2009, financial services accounted for the 20% bulk of investments by value, led by two large deals complet- 10% ed by local Hopu Investment Management Company. In the 0% China India Brazil Sub-Sah. Africa Middle East Russia/CIS largest deal in the region year to date, Hopu purchased a 3% stake in China Construction Bank for approximately US$3.8 Source: 2009 EMPEA/Coller Capital Emerging Markets Private Equity Survey. billion in May 2009. Singapore-based Temasek Holdings ad- ditionally participated in the deal. Earlier in the year, Hopu RMB1 billion (US$146 million) and RMB500 million (US$73 invested approximately US$400 million in Bank of China million), respectively. Although many industrial funds have by purchasing a small stake from Royal Bank of Scotland. been formed, they have been slow to invest. One recent ex- Both transactions were PIPE (public investments in private ample of deal activity is Bohai Industrial Investment Fund’s equity) deals, increasingly popular in 2009. Additional siz- recent partnership with a consortium of local investors in- able PIPE transactions include Bain Capital Asia’s purchase cluding Tianjin-based CDH Investments to acquire 20% of of a minority stake in Gome Electrical Appliances Holding for Chery Automobile for approximately RMB2.9 billion (US$425 US$418 million in June 2009 and the purchase of an 11% million) in June 2009, representing one of the largest deals stake in Hong Kong-listed supermarket operator Wumart by closed with domestic funding. Texas Pacific Group (TPG) Capital and China’s Hony Capital The recent increase in the number of private equity firms that for US$213 million.