PRIVATE EQUITY IN GREATER CHINA DELIVERS A RECORD-SETTING YEAR FOR DEAL VALUE – UP 56 PERCENT IN 2015 – DRIVEN BY MULTI-BILLION DOLLAR DEALS, ROBUST ACTIVITY IN THE INTERNET SECTOR
A Bain & Company survey of private equity executives identifies Greater China as the most attractive market in Asia-Pacific, but flags key market challenges that will require differentiated capabilities to continue generating strong returns

Shanghai – April 26, 2016 – Greater China (China, Taiwan, and Hong Kong) experienced a blockbuster year for private equity (PE) in 2015, driven by a continued surge in multi-billion dollar deals and growing opportunities within the Internet sector.  Yet, there are clouds on the horizon.  Given the challenging macro outlook in China and globally, PE activity in 2016 and beyond could struggle to match that of the past few years.  In response, investors need a differentiated strategy to withstand the impending headwinds.

Bain & Company today released its Greater China Private Equity Market Overview 2016, which reports deal value jumped 56 percent from $44 billion in 2014 to $69 billion last year, due to a doubling of multi-billion dollar deals – 14 in 2015, up from just seven in 2014.  The top six deals alone last year contributed to more than 30 percent of deal value.  Deal volume also grew to 488 in 2015, an increase from 387 in the prior year, with buy-out deals – especially take-privates – driving growth.   Overall, exit value remained robust, but a public market sell-off in the second half of the year decreased exit activity significantly.

"The optimism we had in 2014 for continued PE market growth in Greater China was more than realized last year," said Michael Thorneman managing partner of Bain Greater China and an expert on private equity in the region.  "While increased activity means more opportunities for investors, we can also expect more vigorous competition for deals that could start to dry up as economic conditions deteriorate. The winners in this environment must start to think like value creators, not just acquirers." 

PE Trends in Greater China
According to Bain's research, the emergence of non-traditional investors is increasing the number of active players in the market and intensifying competition for deals.  Institutional investors, for example, participated in more than half of the top 20 deals in 2015.

However, investors are also looking for opportunities to deepen and broaden their exposure in the region.  According to Bain's research, robust PE activity in the country's Internet sector accounted for 40 percent of deal value (up from just 15 percent in 2014) and more than 50 percent of volume, far exceeding other sectors.  Additionally, the size of Internet deals is quickly catching up to those in more traditional industries.  Last year, e-commerce and online-to-offline (O2O) services led the way in terms of activity, but Fintech shows strong growth prospects in the near future.

"Over the last 16 years, private equity in China has cycled through various stages – from the early ‘golden days' of growth capital between 2001-2007 to increased austerity in 2012 and 2013," said Kiki Yang, a partner in Bain's Global Private Equity Practice, who co-authored the report.  "The present Internet surge is a result of PE funds looking for new opportunities to diversify their portfolios – a trend that is likely to continue and expand into other sectors moving forward."

Looking ahead, Bain anticipates strong growth across several additional sectors: 

• Wealth & Health-driven consumption, including healthcare, agribusiness and tourism 
• Selected Internet sub-sectors, especially online retail, Internet financial services, and Internet-related transportation and logistics 
• "Made in China 2025", such as robotics, electric vehicles, pharmaceutical and medical devices, information technology components, and green technology

Outbound PE investments are also expected to grow in deal count and size.  Bain analysis of M&A deal activity in China, published in 2015, shows that the transaction value of outbound deals has risen 22 percent annually since 2009, reaching $79 billion in 2014. 

What's Next for PE?
Despite a record year for PE growth in Greater China, an impending slowdown seems plausible.  In a recent Bain survey of 125 private equity executives in Asia-Pacific, more than 60 percent cited macro-economic conditions and over half pointed to increased competition as key market challenges.  Deal sourcing and valuations also hampered the investment outlook.   As a result, nearly 50 percent of survey respondents expect fundraising to be more challenging in the coming year, due to a bumpy IPO market (82 percent), changes in the macro environment (73 percent) and high valuations (55 percent) that could hamper exit activity.  Still, more than half view Greater China as the most attractive market in the region.  

According to Bain's Weiwen Han, an expert on private equity in China, "Growth capital deals are on their way out in 2016.  In their place, transformation and performance improvement thesis are gaining momentum, due to a high cash upside.  This means that PE funds must exercise a different focus and capabilities to transform across all deal stages."

Bain defines these stages under China's ‘new normal' as: 

• Pre-deal: Sector focus and more sector expertise are required as general growth dissipates in the market 
• Due diligence: Thesis should pivot from pure growth to operational improvement and/or turnaround 
• Portfolio: Re-diligence is required to reconfirm deal thesis. More hands-on value creation to alter strategic and operational paths 
• Organization: Invest disproportionally in portfolio team and operational improvement capabilities

To receive a copy of report or arrange an interview with Mr. Han and Ms. Yang: 

• International media: Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102 
• Chinese language media:  Pinky He at pinky.he@bain.com or +86 21-2211-5585

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