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Country Snapshot Hina’S Private Equity Market Has Experienced Rapid Development Since the Coun- Try’S Accession to the World Trade Organization in 2001

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Country Snapshot Hina’S Private Equity Market Has Experienced Rapid Development Since the Coun- Try’S Accession to the World Trade Organization in 2001 An Overview of Trends in Select Sectors and Markets June 2008 China Country Snapshot hina’s private equity market has experienced rapid development since the coun- try’s accession to the World Trade Organization in 2001. In the last few years, the • Population: 1.3 billion number of funds has grown dramatically, from 20 or so China-dedicated funds C • GDP: US$3,250 trillion entering the market in 2005 to at least 150 funds investing there as of June 2008. Cur- rently, China-dedicated funds represent approximately one-third of the Emerging Asian • GDP per capita: US$2,461 private equity market by number of funds and account for 15% of total capital raised. • Total value of private equity investment (2007): US $9.5 billion China has led the region in deal volume, drawing 33% of investment between 2003 and 2007. Deal volumes rose from US$1.7 billion to US$9.5 billion over that same period, • Total value of private equity investment (Jan. - May 2007): US$3.7 billion representing 0.29% of China’s GDP as of 2007. China is only now beginning to lose share as Emerging Asia’s top investment destination—slipping to 31% of total volume in 2007 • Total value of private equity investment (Jan. - May 2008): US$4.0 billion versus 37% in 2003—as growth of India’s private equity industry is gaining momentum. The year of 2008 marks the localization of the Chinese private equity market. The gov- Sources: Asia Private Equity Review, IMF. ernment’s efforts to foster development of a domestic industry is yielding a number of Renminbi (RMB)-denominated funds deploying local capital. Emerging domestic sources of capital—pension funds, insurance companies, securities firms and municipalities—are gradually securing government approval to invest in private equity. A 2007 law allowing the formation of limited partnerships has created an additional foundation for further growth of the asset class. Regulatory reforms and continued economic liberalization have created a more favor- able environment for private equity, however the trajectory of growth for the asset class in China remains to be seen. The pace and direction of regulatory developments coupled with the government’s participation in the private equity market as both LP and GP—via continued on page 2 Number of Funds Raising Capital for Investments in China 100 Pan-Asia 80 China-dedicated 60 40 20 0 2005 2006 2007 Source: EMPEA © 2008 Emerging Markets Private Equity Association 1 EMPEA Insight state-backed funds—will heavily influence the development of local operations. Large global firms such as Apax Partners, the the domestic PE landscape. Blackstone Group and Switzerland-based Partners Group are opening offices in Beijing this year. Arsenal Capital Partners and Sun Capital are building teams in Shanghai. Fundraising Trends China’s financial services veteran Fang Fenglei is emblematic of the fervored localization taking place. Fang, founder of the Fundraising by China funds has grown dramatically from 2003 to joint venture between Goldman Sachs and Gao Hua Securities, 2007, with capital growing by 40% per year. During the first five launched Hopu Investment Management Company, an indepen- months of 2008 alone, capital commitments to China-focused dent private equity firm, in 2007. Temasek and Goldman Sachs private equity funds totaled US$4.5 billion, versus US$3.9 bil- have contributed US$1 billion and US$300 million, respectively, lion in all of 2007. The number of China-focused funds raising to Hopu’s inaugural US$2.5 billion fund. Through Hopu, Fang capital rose from 32 in 2006 to 67 in 2007. also manages the China-Singapore Hi-tech Industrial Invest- The fund universe has become larger, more local, and more di- ment Fund, a state-backed fund devoted to investments in the verse. Local funds accounted for 19% of capital commitments Suzhou Industrial Park within the Yangtze Delta region. in 2007. Due in part to 2007 legislation offering favorable treat- The National Development and Reform Commission (NDRC) has ment for locally-domiciled funds, RMB-denominated vehicles approved a number of local industrial funds, the first of which, are beginning to emerge alongside existing offshore, US dollar the Bohai Industrial Investment Fund, was launched in 2006. funds. Regulatory changes to promote the development of a The fund targets investments in the northern port city of Tianjin; domestic PE industry have included a limited partnership law it represents China’s first RMB-denominated fund. The NDRC and a change in the tax regime for foreign invested enterprises is soon expected to approve a second city-focused fund, the (FIEs). Fund managers faced with a regulatory model that fa- US$2.9 billion Shanghai Financial Industrial Investment Fund. vors RMB funds are taking notice. The local vanguard includes CDH Investments and Hony Capital, in the market with follow-on Financing these funds as part of a broader effort to develop the funds, both with fundraising targets of RMB 5 billion. Local VC domestic asset class, provident and pension funds have begun firms such as Softbank China Venture Capital, IDGVC Partners to play the role of LPs. Traditionally prohibited from investing in and Legend Capital have created RMB funds; Qiming Ventures the asset class, China’s National Social Security Pension Fund and Sequoia Capital are exploring the approach. (NSSF, with US$74 billion AUM), received approval to invest up to 10% of net capital in PE in April 2008. Since gaining ap- Following the lead of firms such as the Carlyle Group and KKR, proval, the NSSF has committed 2 billion yuan each to CDH foreign GPs are adapting to the changing model by establishing Investments and Hony Capital. In June 2008, the State Admin- continued on page 3 EMPEA Insight Editorial Director Jen Choi Advertising Opportunities [email protected] EMPEA Insight, available free of charge to members, of- Writing and Research Harrison Moskowitz fers readers an overview of the data and drivers behind [email protected] investment trends in emerging markets private equity. Each Production Manager Cristiane Nascimento issue of EMPEA Insight provides an opportunity for a single [email protected] exclusive back page advertisement. Issue-specific place- About EMPEA ments are on a first come, first served basis. Upcoming The Emerging Markets Private Equity Association is a issues include: Central & Eastern Europe and Russia/CIS, broad-based membership organization founded in 2004 to the Middle East, India, Latin America, Southeast Asia, Africa focus on the emerging private equity markets of Africa, Asia, and Real Estate. Europe, Latin America, the Middle East, and Russia. For more information about advertising opportunities and To learn more about how to become a member, please rates, please contact Cristiane Nascimento at nascimento@ contact Farzana Hoque, Membership Manager, at hoquef@ empea.net. empea.net or +1.202.333.8171. 2 © 2008 Emerging Markets Private Equity Association June 2008 istration of Foreign Exchange (SAFE) agreed to invest US$2.5 position in Shanghai-basic Mecox Lane International Mail Order billion in TPG’s latest fund, marking the largest state investment Company for US$80 million in March. in private equity since CIC’s US$3 billion direct investment in the Leveraged buyouts are rare in China—only certain Chinese Blackstone Group in May 2007, and the largest indirect invest- banks are empowered to finance such transactions and foreign- ment to date. exchange controls prevent the use of China-based assets as col- lateral for loans made elswhere. A reversal of this trend appears unlikely in the near term. In 2006, Hong Kong-based Pacific Investment Trends Alliance Group executed China’s first and only leveraged buyout involving a foreign buyer to date—the acquisition of baby-stroller manufacturer Goodbaby Group for US$122.5 million through a Capital deployment has kept pace with rapid growth in fundrais- special purpose vehicle. ing, averaging 28.7% annual growth in total investment volume since 2003. Growth capital accounts for the vast majority of While the privatization of state assets offers some measure investment, at 74% of total value and 83% of transactions by of deal flow, control investments in state-owned enterprises number in 2007. Average deal size for the growth segment rose (SOEs) are marked by sometimes insurmountable regulatory 8% in 2007 to US$35.9 million, from US$33.2 million in 2006. difficulties, particularly for foreign funds. The Carlyle Group’s bid for state-owned Xugong Group Construction Machinery Co. Of the 198 investments recorded in 2007, only 14 were buyouts, Ltd. illustrates these difficulties. The firm’s initial bid for 85% of accounting for US$2.2 billion of the total. Control acquisitions Xugong, made in October 2005, was subsequently lowered to of Chinese companies have been limited primarily to domestic 45% in order to make the investment more palatable to regula- players; foreign fund buyouts have focused on Chinese compa- tors. As of June 2008, the deal had yet to be approved. nies listed on foreign exchanges. In May 2008, HSBC Private Equity bought out Singapore listed China-based clothing manu- facturer Sing Lun Holdings in a transaction valued at S$119.59 Sector Trends million, while CVC Asia Pacific successfully completed the ac- quisition of Asia Dekor Group, a Singapore-listed Chinese floor- Sector trends reflect the growth of China’s middle class. A dou- ing manufacturer, for US$248 million. On the domestic front, bling of per capita GDP between 2000 and 2006 has acceler- CITIC Capital acquired 100% of Hunan AVA Holdings, one of the ated the development of a consumer market in China. Food nation’s largest dairy companies for US$82 million. Sequoia and beverage, consumer services and media have all proven Capital China completed its first buyout in China with a control attractive investment targets.
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