Buyout deals expected in China after private equity investments fall to eight-year low

More buyout deals are expected in the private equity market in China over the next five years, as PE investments fell to an eight-year low, with deal value dropping 53 percent to US$62 billion in 2022 from a year ago.

In China, the number of deals shrunk 38 percent year-on-year in 2022, with the average deal size the lowest since 2013 at US$82 billion, says the China Private Equity Report 2023 released on Tuesday.

"Driven by the uncertain economic outlook and ongoing geopolitical tensions, we expect buyout deals to accelerate in the next five years, although it represents only 9 percent of China's total deal value," said Zhou Hao, head of Bain & Company's China PE practice.

In the past year, growth deals continued to dominate and accounted for 74 percent of China's total deal value. Advanced manufacturing and health care recorded an increase in their share of deal value, while the Internet and tech sector experienced a sharp decline.

The timing of Chinese companies' transitioning from first generation founders to second generation in recent years could also prompt more buyout opportunities, he added.

In the Asia-Pacific region, deal value plunged to US$198 billion, down 44 percent from a year earlier and 9 percent below the previous five-year average.

The increasing number of spin-off of the China operations from multinational companies might also lead to more buyouts in the mid term.

Investment activities and sentiment are gradually picking up in accordance with consumption recovery in the first few months this year, but it could take a little longer for that to translate into actual deals, added Bain's Beijing-based partner Lucia Li.

While assessing the investment value of emerging local brands, PE funds would pay more attention to profitability and cash flow instead of just looking at the brands' attractiveness and awareness in the short term, noted Stanley Chen, Associate Partner at Bain & Company.