A challenging year for PE market in China anticipated

This year is expected to be a challenging year for the private equity market in China. But it will also come with buying opportunities for investors, said Bain & Company.

Considering the macro headwinds from geopolitical uncertainties and economic softness, China's PE market is likely to see a slowdown in 2022, Bain said in a report released on Tuesday.

Policy risks also add to investors' concerns over the current market, and the widening gap between the expectations of sellers and buyers after the recent stock market retreat can also be a brake on PE activity.

Another challenge is that exit conditions will continue to be under pressure due to the tightening of regulations on US IPOs.

"However, this could present buying opportunities for investors who are looking for opportunities in China," said Kelly Pu, Bain & Company partner and report author.

"For instance, sponsor-to-sponsor deals, as general partners face pressure to exit, while US IPO is no longer a viable path and the Hong Kong stock market could be less favorable in the valuation for certain sectors."

Technology continues to be a high point and it's interesting and positive to finally see ESG (Environmental, Social, and Governance) taking such a strong place in being attractive themes and sectors for potential investments, and in the diligence of all deals."

In 2021, the PE market in China was active in value and numbers, with the deal value peaking at a 10-year high of US$128 billion, while both fundraising and exits saw a sharp decline in the second half of last year, reaching a 5-year record low, the report showed.

Growth deals continued to dominate, representing 65 percent of total deal values.

Investment hotspots shifted to sectors such as semiconductors, electric vehicles and renewables in the second half of 2021, while online services and e-commerce cooled.

"(Investors) should also invest in value-creation plans on the emerging return drivers of mergers and acquisitions and cost improvement.

"Also, they should plan for alternative exit paths such as HK IPOs and trade sales," said Zhong Kai, Bain & Company Associate Partner and co-author of the report.