Opinion

Private equity is proving its worth in China

By Michael Thorneman and Weiwen Han (chinadaily.com.cn)
Updated: 2010-03-18 13:46

In the year that funding was received, the surveyed companies had net profits of 36 billion yuan. Two years post-funding, profits of the same group of companies had nearly doubled to 71 billion yuan. One factor is that PE-backed companies benefit from the transfer of management know-how. This higher profit growth is generally not achieved through reduced employment or lower salaries but by pursuing the right growth opportunities and through efficient management of costs, information technology and inventories.

Interviews with executives also revealed that they valued the role their PE partners played in improving corporate governance, such as improvement of accounting transparency and tax disclosure. The Chinese government gained, too: The data show that PE-backed companies yield higher tax payments, and that these have increased at a rate faster than taxes paid of publicly listed businesses since 2002. Total tax payments of PE-backed companies increased at a 28 percent compound annual rate, 10 percentage points higher than those of their publicly listed peers.

Another noteworthy effect of PE is that it has led the shift toward domestic consumption, a government policy goal. While PE investment in China increased by 58 percent since 2002, investment in the consumer goods and retail industries grew by 77 percent. PE investments in consumer and retail businesses now rival those made in the traditionally strong IT and media sectors. Accounting for less than one-third of the value of IT and media deals in 2002, consumer and retail investments reached parity with them in 2008. Not surprisingly, PE's increasing presence in the consumer goods and retail sector is having a positive impact on overall domestic consumption and sales. Retailers backed by PE investors booked a sales growth of 47 percent compared with just 16 percent for publicly listed retail companies. PE-backed consumer goods companies also booked sales growth of 30 percent compared with 18 percent for publicly listed peers. Along the way, PE has also been pushing investment into the inland provinces, another public-policy goal.

PE firms still face plenty of challenges as they work to build on their initial success. They will need to sharpen their due diligence capabilities to compensate for a lack of transparency in financial reporting and to navigate the complex regulatory and deal-approval process. Instead of scattering their energies by chasing too many opportunities, they will want to concentrate them on keeping the companies in which they invest focused on what they do best,

PE will be a player as China's economy continues rapidly to expand and evolve. As the nation's business challenges grow more complex, private equity's skills and management expertise will make it an increasingly valuable asset.

Michael Thorneman is the Managing Partner of Bain & Company Greater China, co-leads the firm's Private Equity practice in China. Weiwen Han is a Bain partner focusing on Private Equity. Both are based in Bain's Shanghai office.

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