Opinion
Private equity is proving its worth in China
By Michael Thorneman and Weiwen Han (chinadaily.com.cn)
Updated: 2010-03-18 13:46
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Private equity's (PE) quiet but significant role in China's economy doesn't get a lot of headlines. There are no billion-dollar blockbuster deals, no hostile takeovers, no big initial public offerings. Yet over the 10-year period since PE and venture capital players entered China, the industry has played a supporting role in economic growth, job creation, innovation and entrepreneurial success.
PE investors have accomplished this as a byproduct of what it has always done best: scouting out good companies in fast-growing markets and promoting best practices in operations and governance. To do this, they have had to overcome the initial skepticism from Chinese entrepreneurs. What's more, they have usually been minority investors with largely hands-off participation in management.
Indeed, PE has shown great adaptability to China's opportunities. For instance, it has shifted its focus to providing growth capital, not actively staging turnarounds with its own hand-picked executives. In that sense, the private equity industry in China shares characteristics more common to venture capital. The main reason for this change is that much of China's economy has been in high-growth mode. Limited access to expansion capital for smaller companies and new enterprises has led entrepreneurs to private equity investors for growth capital to fill the breach. As a result, more than 80 percent of private equity investments were in the form of capital to finance growth. For its part, PE has picked carefully and well.
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These conclusions are drawn from a Bain & Company survey of mainland Chinese companies that received at least $20 million in financing from foreign or Chinese private equity funds between 2002 and 2006. The survey excluded deals completed after 2006 to permit tracking of post-investment performance for a period of at least two years. The analysis is based on data obtained on 100 PE-backed companies, accounting for more than 50 percent of the total value of private equity deals completed during the five-year period. These companies represent a broad range of industries, company sizes and geographies.
Among other major survey findings was that, simply put, PE helps create better-run companies. Indeed, firms with PE shareholders turned in annual revenue growth three percentage points higher than their publicly listed peers. In the year they first received PE investments, the companies posted total revenue of 535 billion yuan ($78.37 billion). Two years later, they generated 867 billion yuan, a 62 percent rise. Even as they increased spending for employee compensation and R&D, PE-backed firms booked substantially more robust profit growth than the benchmark companies. They posted an average earnings growth rate of 39 percent versus 25 percent for the publicly listed companies in the survey.
