A service of

Asia private equity 2025 preview: China

•  China GPs will focus on cross-border deals as poor conditions at home stagnate
•  Companies serving domestic demand are in better position but require value-add
•  Narrowing bid-ask spreads should see deal activity pick up in the coming year

 

With a flurry of government stimulus measures yet to move the needle for Chinese private equity, there is a growing appreciation of the prudence in building exposure away from stubborn macro weakness and enduring regulatory risks. China nexus strategies – helping local players go global and foreign groups tap China – are already a feature of the industry. They are expected to ramp up.

Recent activity on this front includes Hillhouse Investment and HongShan opening London offices as staging posts to pursue European deals; HongShan forming a joint venture with Chinese sporting goods brand Li Ning [HKG:2331]aimed at global expansion; and FountainVest Partners acquiring Japanese jewellery brand Tasaki with a view to boosting the company’s China sales.

“Our pipeline is 100% focused on China for global opportunities. The US is going to be complicated due to regulatory issues. For us, it’s Japan and Europe given the size of the markets, the less regulatory scrutiny we face,” said Tony Jiang, co-founder of Shanghai-based travel and consumer-focused GP Ocean Link.

The firm has made one investment in Japan and has another pending in Europe. Jiang added that he is also looking at China-based deals where the companies have 80%-90% global revenue.

The imminent return of President-elect Donald Trump – and his stated plans to impose more punitive tariffs on China – has thickened the plot.

Eric Xin, a managing partner at local buyout firm Trustar Capital, noted that Chinese companies are diversifying their supply chains to rebalance the risks. He also expressed confidence in China’s trade resilience, saying that the country’s competitive edge is strong enough to sustain growth even if tariffs are as high as 60%.

Philip Hu, a founding member and managing director at Primavera Capital Group, highlighted energy transition as an area where China is poised to maintain its global leadership. He pointed to industry data on global electric vehicle (EV) sales indicating China had a more than 50% market share in 2024, followed by Europe at 25% and the US at 10%.

China’s share has remained robust despite the removal of numerous subsidies. In contrast, industry analysts who had predicted EV penetration of the US automotive market would reach 50% by 2030 have since dialled back their projections to 30% in response to expectations of subsidy rollbacks. Meanwhile, Europe has supply chain issues.

“The recent bankruptcy of Northvolt, which was supposed to be Europe’s most promising battery company, highlights the challenges of being able to compete on cost and speed to market,” Hu added.

Domestic agenda

Geopolitical tensions will weigh less heavily on companies that focus on domestic demand. Xin of Trustar continues to see opportunities involving multinationals carving out their China units – actions that might be influenced by geopolitics but ultimately create clean stand-alone businesses.

For FountainVest, helping international companies enter the Chinese market is a pertinent theme. If they are making products in China for the local market, tariffs are less of a concern.

“However, under this China-nexus strategy, investors need to accurately identify the latest trends in China’s consumption patterns and recognize that the quality of the asset matters,” said Frank Tang, chairman and CEO of FountainVest. “For example, Tasaki stands out for its strong brand and R&D capabilities, which could potentially satisfy the increasing demand from Chinese consumers for pearl accessories.”

FountainVest has visited numerous geographies over the past decade in search of suitable assets. More recently, it has concentrated on Southeast Asia, but opportunities are scarce, prompting Tang to question whether general enthusiasm for this market among Chinese GPs has paid off.

Once a quality asset is secured, significant value creation work is required to prevail in a China market characterised by weak consumption yet intense business competition.

Delivering operating efficiencies through the application of technology is a popular approach following successes in this area for private equity-backed Luckin CoffeeYum China [NYSE:YUMC], and McDonald’s China. Meanwhile, building out a China store footprint can also help increase sales, but it is hard to execute.

Investors have put USD 39.8bn to work in China so far in 2024, which represents a 10-year low according to AVCJ Research. GPs are, however, making headway with control deals. Announced deal flow amounts of USD 13.6bn, more than double the 2023 total. Listed company spin-offs, carve-outs, and sponsor-to-sponsor transactions are expected to become more prominent.

Ascendant Capital Partners was responsible for one of the largest deals – a USD 1.9bn take-private of US-listed Hollysys Automation Technologies. Despite companies trading at low multiples, Ocean Link’s Jiang does not expect to see a lot more of the same.

First, companies may push ahead on transactions without private equity assistance. For example, earlier this month, Fosun Tourism [HKG:1992] announced plans to buy back its own shares and become a privately held subsidiary of Fosun International [HKG:0656]. Second, there is often a reluctance to go private when the path back to the public markets is unclear.

“They think that if they stay public, one day they will get a re-rating. But if they go private, they don’t know when they can do an IPO again,” said Jiang. “One thing we are looking at is spin-offs from listed companies. Valuations are cheap, they don’t want to be diluted, but there is a part of their business where we think we can strike a valuation.”

At the same time, the notion that lower public market valuations will filter through to private markets doesn’t necessarily hold. Many companies are sticking to the elevated valuations of their prior rounds and would only entertain a substantial discount if on the brink of collapse.

The crystal ball

Looking ahead to 2025, Tang of FountainVest doesn’t anticipate a resurgence in activity because capital is scarce and investors are deploying it conservatively. He is cautiously optimistic of a gradual revival, with sponsor-to-sponsor transactions to the fore. FountainVest recently acquired a domestic pet nutrition business, facilitating exits for various existing PE and VC backers.

Moreover, industry participants point to two potential impending drivers of deal flow. On the one hand, Chinese companies that can demonstrate resilience, having weathered the difficulties of the past three years, might be viewed more favourably by investors. On the other, continued pressure for exits could narrow the valuation gap.

“By 2025, the fourth year of valuation adjustment, rationalised valuations will become the new normal,” Tang said. “On the supply side, we can expect to see more willing sellers, particularly in the VC space. Heavily funded companies are facing redemption pressure, leading to various exit strategies such as management buybacks, sponsor-to-sponsor trade sales, and even control deals.”

He added that the macro picture may become clearer by January, with Trump in office and China perhaps having offered more insights into policy direction. Hu of Primavera echoed this sentiment, with the caveat that it’s challenging to predict exactly how variables linked to geopolitics, trade, and domestic economic support measures will play out.

“All the announcements made by policymakers thus far continue to point to a supportive environment next year across housing, financial markets, fiscal, monetary, domestic consumption, etc,” he said.

“Based on what has been shared thus far, one could see a world where activity picks up both in the public and private markets, but we will still need to wait and see what initial chess moves are made both at home and abroad early next year to get a clearer picture of what’s to come.”