Chinese Private Equity Funding Hit By Sharp Downturn

Fundraising by renminbi-denominated private equity groups in China plummeted 86 per cent last year, squeezed by a tighter availability of credit and a slower initial public offering market.

The fall — revealed in a new report published on Friday — underlines how the Chinese private equity market has gone into reverse from the boom times of a few of years ago when scores of new funds were launched and the country’s technology companies attracted sky-high valuations.

Hundreds of small, inexperienced Chinese private equity funds that rushed into investments in technology and new economy companies have begun to suffer from a sharp contraction in fundraising and a tougher environment for exiting investments.

Private equity houses raised about $13bn in renminbi-denominated funds in 2018, down about 86 per cent from the $93bn raised the year before, according to data compiled by the consultants Bain & Co.

At the same time, small Chinese private equity groups struggled to cash in on their investments in 2018. Sales and initial public offerings worth less than $100m fell by about 64 per cent last year compared to a five-year average.

“The level of optimism and fervor for investing in the tech sector foreshadowed what we are seeing now,” said Usman Akhtar, a partner at Bain & Co, referring to how many small private equity houses are struggling to exit from investments at expected prices. “It’s the start of this and it may take a few years to pan out.”

The tightening of credit in China is a broad trend with an impact far beyond private equity. Banks, trusts and other sources of capital have been squeezed during China’s attempt to slow the growth of debt.

So-called shadow banking has been an important source of funds for small private equity groups. Without these channels to fresh cash, many of the imperiled funds are simply shutting down, raising doubts over whether investors will be paid.

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