FIRMS PIN HOPES ON CHINA AFTER A DIFFICULT 2022

With global deals suffering a slump last year, investment opportunities now seen in mainland companies with growth potential, forum told

Private equity and venture capital firms are hoping China and Asia will emerge as bright spots for the industry after a lacklustre couple of years, the China Private Equity Summit heard yesterday.

Asia remained the biggest economic growth region, a Goldman Sachs executive said at the event, adding the bank would focus on finding and investing in Chinese companies that had the potential to expand regionally.

“What we’re looking for now are domestic champions in China that could grow outside the country and go throughout the region,” Stephanie Hui, head of private and growth equity at the bank, told the summit, which was organised by the Hong Kong Venture Capital and Private Equity Association.

The event comes after a difficult 2022 for the industry. Several headwinds last year disrupted the merger and acquisition space.

Global deal volumes declined by 17 per cent and deal values fell by 37 per cent from recordbreaking levels in 2021, although both remained above 2020 and pre-pandemic levels.

Meanwhile, macroeconomic headwinds, mounting inflation and higher interest rates, together with abrupt public market valuation adjustments, have led to challenges for the private equity industry.

The private equity industry ended 2022 with a record US$3.7 trillion in dry powder, according to data provided by Bain & Company, which fund managers will be eager to deploy as soon as possible.

Secretary for Financial Services and the Treasury Christopher Hui Ching-yu, who attended the event, said the gathering of experts at the forum would help ensure “momentum in the industry”.

“The government will continue to strengthen and leverage Hong Kong’s advantages to enhance [its] competitiveness,” Hui said, citing the city’s position as a gateway to mainland markets as a key advantage.

The government was also aiming to leverage Hong Kong’s position as a hub for family offices, its various connect schemes with the mainland market and its access to green finance, he added.

While its recent policy initiatives tailored for family offices had made it a more attractive platform for business, Hong Kong also held a competitive edge in the wealth management industry through its various supportive measures, a favourable tax environment for the fund industry and the expansion of the fund distribution network, Hui said.

Moreover, China was an attractive place for investors with several untapped high-growth companies, said Boon Chew, managing partner at Citic Capital.

“On an absolute basic [level], China has become a lot more attractive,” Chew said during a panel discussion. “Policy is a lot more growth-friendly and there’s a lot more pull into China than 12 months ago, and economically, China is on a much more stable footing than the United States or Europe.”

Deal making would be more attractive in 2023 than in earlier years and buyout volumes would come back as buyer confidence saw an uptick, Chew said.

Chinese banks were also a bright spot for the industry as they had a lot of liquidity compared to their international peers, said Frank Tang, chairman and CEO at FountainVest Partners.

“The bright spot is that Chinese banks have a lot of liquidity and ability to lend, much more compared to international peers that have a lot of debt and higher interest rates,” he said.

China was facing a “slower but steady recovery” compared to the rest of the world, said Max Chen, partner at Primavera Capital Group, and firms therefore needed to be “more ready for a potential further slowdown in the second half of the year”.

But there were still some emerging high-growth portfolio areas such as artificial intelligence technology and services driven by it, Chen said.

Eric Zhang, managing director at General Atlantic, said he saw more companies pivoting to see how they could list on the mainland and in Hong Kong, which meant a better understanding of how to navigate China’s changing policy environment was needed.

“Shenzhen and Shanghai have a lot of good liquidity, but we still need to learn how the regulatory policy [works] and how to navigate that environment to be able to list efficiently,” Zhang said.

The bright spot is that Chinese banks have a lot of liquidity and ability to lend, much more compared to international peers

FRANK TANG, CHAIRMAN AND CHIEF EXECUTIVE, FOUNTAINVEST PARTNERS