Shanghai Daily

Creating better-run companies

Private equity's quiet but significant role in China's economy doesn't get a lot of headlines.

Par Michael Thorneman and Weiwen Han

First published on avril 02, 2010
min


Private equity's quiet but significant role in China's economy doesn't get a lot of headlines. There are no billion-dollar blockbuster deals, no hostile takeovers, no big initial public offerings. Yet over the 10-year period since PE and venture capital players entered China, the industry has played a supporting role in economic growth, job creation, innovation and entrepreneurial success. Limited access to expansion capital for smaller companies and new enterprises has led entrepreneurs to private equity investors for growth capital to fill the breach. China has become a leading destination for PE capital in Asia. The above conclusions are drawn from a Bain & Company survey of companies on the Chinese mainland that received at least US$20 million in financing from foreign or Chinese private equity funds between 2002 and 2006. The survey excluded deals completed after 2006 to permit tracking of post-investment performance for a period of at least two years. The analysis is based on data obtained on 100 PE-backed companies, accounting for more than 50 percent of the total value of private equity deals completed during the five-year period. These companies represent a broad range of industries, company sizes and geographies. Among other major survey findings was that, simply put, PE helps create better-run companies. Indeed, firms with PE shareholders turned in annual revenue growth three percentage points higher than their publicly listed peers. In the year they first received PE investment, the companies posted total revenue of 535 billion yuan (US$78.37 billion). Two years later, they generated 867 billion yuan, a 62 percent rise. Even as they increased spending for employee compensation and research and development, PE-backed firms booked substantially more robust profit growth than the benchmark companies. This higher profit growth is generally not achieved through reduced employment or lower salaries but by pursuing the right growth opportunities and through efficient management of costs, information technology and inventories. The Chinese government gained, too. PE-backed companies yield higher tax payments, and that these have increased at a rate faster than taxes paid by publicly listed businesses since 2002. Total tax payments of PE-backed companies increased at a 28 percent compound annual rate, 10 percentage points higher than those of their publicly listed peers. Another noteworthy effect of PE is that it has led the shift toward domestic consumption, a government policy goal. While PE investment in China increased by 58 percent since 2002, investment in the consumer goods and retail industries grew by 77 percent. Along the way, PE has also been pushing investment into the inland provinces, another public-policy goal. Michael Thorneman is the Managing Partner of Bain & Company China. Weiwen Han is a Bain partner focusing on Private Equity.

Private equity's quiet but significant role in China's economy doesn't get a lot of headlines. There are no billion-dollar blockbuster deals, no hostile takeovers, no big initial public offerings.

Yet over the 10-year period since PE and venture capital players entered China, the industry has played a supporting role in economic growth, job creation, innovation and entrepreneurial success.

Limited access to expansion capital for smaller companies and new enterprises has led entrepreneurs to private equity investors for growth capital to fill the breach. China has become a leading destination for PE capital in Asia.

The above conclusions are drawn from a Bain & Company survey of companies on the Chinese mainland that received at least US$20 million in financing from foreign or Chinese private equity funds between 2002 and 2006. The survey excluded deals completed after 2006 to permit tracking of post-investment performance for a period of at least two years.

The analysis is based on data obtained on 100 PE-backed companies, accounting for more than 50 percent of the total value of private equity deals completed during the five-year period. These companies represent a broad range of industries, company sizes and geographies.

Among other major survey findings was that, simply put, PE helps create better-run companies. Indeed, firms with PE shareholders turned in annual revenue growth three percentage points higher than their publicly listed peers.

In the year they first received PE investment, the companies posted total revenue of 535 billion yuan (US$78.37 billion). Two years later, they generated 867 billion yuan, a 62 percent rise. Even as they increased spending for employee compensation and research and development, PE-backed firms booked substantially more robust profit growth than the benchmark companies.

This higher profit growth is generally not achieved through reduced employment or lower salaries but by pursuing the right growth opportunities and through efficient management of costs, information technology and inventories.

The Chinese government gained, too. PE-backed companies yield higher tax payments, and that these have increased at a rate faster than taxes paid by publicly listed businesses since 2002.

Total tax payments of PE-backed companies increased at a 28 percent compound annual rate, 10 percentage points higher than those of their publicly listed peers.

Another noteworthy effect of PE is that it has led the shift toward domestic consumption, a government policy goal. While PE investment in China increased by 58 percent since 2002, investment in the consumer goods and retail industries grew by 77 percent.

Along the way, PE has also been pushing investment into the inland provinces, another public-policy goal.

Michael Thorneman is the Managing Partner of Bain & Company China. Weiwen Han is a Bain partner focusing on Private Equity.