China Fund News reporter Wu Jun
Recently, Bain & Company, a world-renowned consulting company, released the "2024 China Private Equity Market Report", which believes that China's private equity market is expected to continue the pressure trend in 2023 in 2024 and enter a period of shift adjustment. When valuations return to rationality, market trading activity will usher in a new window period.
Zhou Hao, global partner of Bain & Company and chairman of the private equity fund and M&A business in Greater China, and Zheng Siyuan and Gao Ping, core members of Bain & Company's private equity fund M&A business in Greater China, made relevant interpretations of the relevant content of the report and the opportunities and challenges faced by the private equity market.
Last year, the trading volume of RMB funds soared, and investments in semiconductors, pharmaceuticals, and automobiles continued to increase
According to the 2024 China Private Equity Market Report released by Bain & Company, downward pressure on economic growth still exists, and China's private equity market is expected to continue the pressure trend in 2023 and enter a period of shift adjustment in 2024, coupled with the increasing difficulty of IPO exit and the gap between buyer and seller valuation expectations.
Gao Ping, a core member of Bain & Company's M&A practice in Greater China, reviewed the changes in China's private equity market in 2023.
First, investment deal activity continued its structural downward trend, falling to a decade-low low. After experiencing a high in 2021, the private equity market fell for two consecutive years in 2022 and 2023. The development of the Chinese market has been largely in line with the global market, with investment transaction value falling by 58% to US$41 billion in 2023 compared to the average of the previous five years (2018-2022), and the transaction volume also fell by 31%.
In addition, in terms of deal composition, growth investments continued to dominate the private equity market, accounting for 60% of the total deal value. Compared with the past five years, investment in e-commerce, technology, online services and other fields has shrunk, but investment in semiconductors, biomedicine, automobile travel and other fields has continued to increase, and the proportion of transaction value is also relatively high.
In terms of investor composition, domestic general partners (GPs), especially RMB funds, remained the most active players in China's private equity market, accounting for 42% of the transaction value in 2023, an increase of 21 percentage points from 2022. At the same time, Middle Eastern investors have become more active to a certain extent.
In addition, the market's trading multiples have dropped from an average of about 20 times from 2014 to 2017 to 18 times from 2017 to 2020, and have continued to decline by 20% from 2020 to 2023. In this case, the market becomes more rational and more conducive to transactions in the long run.
In terms of exits, IPO exits will decline further in 2023 compared with previous years, but the proportion of transactions between private equity funds will continue to increase.
In terms of fundraising, from 2017 to 2023, the overall fundraising situation is declining. Structurally, however, there has been an increase in the fundraising of renminbi funds.
Market activity is gradually picking up, and GPs should take the initiative to find exclusive trading opportunities
Talking about the private equity market, Zhou Hao, global partner at Bain & Company and chairman of the Greater China Private Equity Fund and M&A practice, said that like the global market, the Chinese market has been affected by the global economic slowdown and macroeconomic uncertainty. After reaching a high point in 2021, China's private equity market will see a significant decline in deal size, number of financings, and exit scale in 2022 and 2023.
Looking forward to China's private equity market in the next two or three years, Zhou Hao believes that there will be several major characteristics: first, investment activity is picking up, but there is no V-shaped reversal, and the next two or three years will be relatively flat development. Bain found that the "dry powder" (the amount of money that has been raised but not invested) in the market is still very large, because the market is not short of funds, but good targets are increasingly lacking. For example, US dollar funds are increasingly focusing on investing in large-scale transactions such as late-stage mergers and acquisitions, but there are not many such targets in the market, and large holdings, especially assets with stable cash flow and solid fundamentals, are more sought after.
Second, market trading multiples, or PEs, have fallen by 20% over the past two years. From 2016 to 2018, the transaction multiple of the target was about 22 times or more, which is very high, although the transaction multiple is now declining, and the expectations of buyers and sellers in terms of valuation still need to be run in for a while, resulting in a relatively long delay in the completion of the transaction and a slow increase in the number of transactions.
Third, the most important thing for GPs now is to exit and return to LPs (limited partners), but since 2016, there are still more than 60% of the transactions invested by private equity funds that have not yet been exited. If you can't achieve a return in this situation, you can't raise new funds, so it will be more challenging to raise money in the next two to three years, especially for US dollar funds.
In this regard, Zhou Hao's advice to private equity investors and GPs is: first, GPs need to do strategic sorting and fund transformation, under the current macro environment changes, the logic of relying on rapid market growth in the future is no longer valid, whether to focus more on some specific tracks or specific investment themes, each fund needs to think carefully; furthermore, how to maximize the value of enterprises, help them exit as soon as possible, or help the invested companies improve their performance; finally, GPs should not "wait for the rabbit", but "take the initiative" , using their existing resources and capabilities to find exclusive trading opportunities and new trading themes.
GPs are paying more attention to growth, reducing costs and increasing efficiency, and increasing the activity of corporate mergers and acquisitions
Zheng Siyuan, a core member of Bain & Company's M&A business in Greater China, explained the opportunities and challenges facing China's private equity market from the aspects of "fundraising, investment, management and withdrawal".
In terms of fundraising, it is still very difficult at present. In terms of investment, it is difficult for market activity to return to the previous high, but it is slowly returning to a relatively active state, and the opportunity lies in the fact that the fund still has a lot of money in hand; in terms of management, from the past to focus on whether the invested enterprises have good growth, to now it is necessary to look at reducing costs and increasing efficiency, and how to let it recover the income as soon as possible during the investment period and return it to the LP; in terms of exit, with the slowdown of IPO exit, now investors are also broadening the exit channels, S fundDiversified exit methods such as strategic mergers and acquisitions will continue to rise, and from 2022 onwards, there will be more and more S funds (secondary market transactions), rather than direct investment in the primary market.
Zheng Siyuan said that Bain did a survey of GPs and found that compared with five years ago, some factors are more important for making transactions: first, GPs hope to buy a relatively reasonable valuation multiple, and is no longer willing to trade at a valuation of 20 times as when the market was at a high point from 2017 to 2019; second, it is necessary to clarify the exit path when investing; third, it hopes that the fundamentals of the portfolio companies are more stable; and fourth, it hopes to gain more board seats, so that the invested companies have more control over the invested companies and gain more space for value creation.
"GPs used to focus more on growth, but now it is becoming more and more important to reduce costs and increase efficiency, and in recent years, there has been an increasing focus on post-investment management and exit management. It is hoped that the invested companies will not only have good growth, but also good profits, so that they can achieve greater value creation when exiting. Zheng Siyuan said.
As for generative AI, Zheng Siyuan said that it is now the focus of the fund, and its impact on the invested companies is very far-reaching, mainly reflected in three aspects: first, it may affect the overall efficiency of the enterprise and reduce costs, second, AI can improve customer experience, and third, disruptive products and services also have an impact on the invested companies.
In addition, Zheng Siyuan also said that in recent years, some new transaction themes have attracted attention: first, cross-border going overseas, in recent years, the cross-border transactions of domestic enterprises to go overseas have increased, showing obvious ability to export to the outside world; second, enterprise mergers and acquisitions, some enterprises and strategic investors were more active last year, and mergers and acquisitions and sales to strategic investors in the future have become better exit channels in addition to IPOs; third, multinational enterprises have shown many opportunities for divesting assets.
Editor: Xiao Mo
Review: Xu Wen