ESG attracting more PE interest, set to grow, says Bain report

Appetite for environmental, social and governance-related investment is poised to see growth in China over the coming years, according to a report by Bain &Company on China's private equity market.

Investments into the ESG space have already seen rapid growth in China, with evidence that ESG-focused PE investments have higher financial returns, the report said.

General partners are increasingly aligning their investment strategy with ESG principles and are more conscious about avoiding risk related to ESG, according to Zhou Hao, a Bain partner and co-author of the report.

"This is on a par with those found in the Asia-Pacific region, with around 50 percent of investors actively seeking investment in ESG-related fields," Zhou said.

The report found that more than half the GPs surveyed are seeking investments that have positive social or environmental impact and nearly 70 percent of due diligence now includes an ESG component.

"Even though the Asia-Pacific trails other regions, it's clear, based on our research, that ESG in China is becoming increasingly central to the investment thesis," said Lucia Li, another Bain partner and co-author of the report.

Li identified clean energy, renewable energy and wastewater treatment as some of the potential areas of interests for PE investments.

On a broader scale, the PE sector enjoyed a strong recovery last year, with China's total deal value rising to $97 billion, up 42 percent from 2019 and 22 percent higher than the previous five-year average.

Government-guided or affiliated funds, which are government backed, continued to play a significant role in facilitating domestic deals.

Analysts pointed to China's swift actions to control COVID-19 to be a key reason bolstering business activity, such as buyout funds partnering on a number of megadeal opportunities.

"There has been a surprisingly quick rebound in China and we are seeing record highs in terms of deal values. As soon as the pandemic started to ease, the country's general partners quickly got back to work closing deals that they had put on hold,"Zhou said.

He said these are being driven by strong demand, investment in key sectors and the fact that the China market was the first major economy to essentially recover from the pandemic.

Top buyout deals covered various industries, with technology, media and telecommunications accounting for the largest number and healthcare sector's deal count contribution increasing the most on a year-on-year basis.

Increasing domestic development in innovation led to better performance of companies in select industries with high valuation potential, such as 5G.

While exits recovered slightly from 2019, they are still at a low level and the report found this minor growth came despite a fall of large-scale exits of over $1 billion each.