Domestic consumption is a vital growth engine for China as other areas of the economy, notably export-related supply chains, come under pressure. The government has announced a slew of measures designed to boost household spending, but PE investors warn that short-term stimulus will have little direct impact on their ability to deploy capital and deliver exits.

“Understanding major trends and policy directions is important. However, private equity investors shouldn’t rely on short-term policy measures because these create opportunities that are too unpredictable and transitory to seize,” said Michael Chen, a managing director at Centurium Capital.

The slight uptick in China PE and VC investment in 2024 shouldn’t obscure the bigger picture. Deployment hovers above a 10-year low amid concerns about a sluggish post-pandemic economic recovery, exits uncertainty, and geopolitical tensions.

Consumer sector activity also remains slow. The USD 1.4bn recorded in 1Q25 – an unusually high 14% of China’s total – reflects a drop-off in the technology sector and the outsize impact of a single deal. If anything, Alibaba Group’s USD 1.3bn sale of Sun Art Retail to DCP Capital demonstrates how difficult conditions are promoting tech giants to withdraw from non-core areas like consumer.

Assessing weak investor appetite for China, Philip Hu, a founding member and managing director of Primavera Capital Group, identifies internal and external factors. The latter have been volatile, shaped by unpredictable US-China relations. The situation has escalated from largely bilateral to global scale in the last few weeks, becoming “the killer to decision making.”

“No matter what country you are in, companies face great uncertainty from the current US-China trade tensions, which means important decisions are being delayed,” Hu said.

“Whether it is capex, M&A, investment, hiring, building a new factory, or even starting a new business, these decisions are likely being pushed back by one or two quarters. Uncertainty impacts the private markets in a similar way, although it creates unique opportunities as well.”

Effective policies?

China’s pro-consumer policies have ratcheted up since 4Q24, with an emphasis on stabilising property markets, stimulating consumer demand, supporting private business, and driving innovation. Investors are also positive on Beijing’s approach to recent trade negotiations, highlighting a pragmatism in safeguarding national commercial and political interests that contrasts with the US.

On the monetary side, there have been cuts in interest rates and the portion of deposits banks must hold in reserve, while the stock market has received liquidity injections. There is also a 30-point plan comprising demand and supply-side measures ranging from lowering childcare costs to improving the pension system, although some observers are sceptical about local government implementation.

Other efforts are more targeted, such as trade-in programmes and subsidies intended to encourage the replacement of household appliances and electronic vehicles (EVs). There are plans to expand the size and scope of subsidies later this year. Initial measures were rolled out several months ago, but PE investors interviewed for this story claimed to have seen little direct impact across their portfolios.

According to Charlie Chen, a managing director and head of research at China Renaissance, noted that subsidies typically last six months to a year. The primary goal is to drive order volume, which filters through to the upstream manufacturing and supply chain segments.

“It keeps workers employed and sustains the broader economy, from factories to services like food delivery. If the chain breaks during a downturn, the whole system stalls,” he said.

Policies already appear to be delivering results. Retail sales of consumer goods expanded 4.6% year-on-year in 1Q25, slightly faster than last year, according to the National Bureau of Statistics (NBS). Sales of communication devices and home appliances climbed 26.9% and 19.3%, respectively.

Retail sales growth was 5.1% in April, missing the consensus analyst estimate of 5.5%. The negligible rebound in consumer sentiment is partly responsible for Natixis projecting Chinese GDP growth of 4.2% in 2025, down from 5.4% in 2023 and 5% in 2024. More stimulus is expected, its intensity and frequency contingent on external factors and the trajectory of the domestic economic recovery.

At the same time, there is renewed life in Hong Kong’s capital markets, with the Hang Seng Index close to matching the three-year high posted in March. Chen of China Renaissance believes this partly reflects shifting preferences amid geopolitical tensions, tipping mainland markets to benefit as well. Once again, sustainability depends on economic performance.

“As long as China’s recovery continues, we expect continued capital inflows into mainland and Hong Kong markets, providing meaningful support for the equity market,” he said.

PE and VC-backed IPOs have been depressed since regulatory action pared back offerings on mainland exchanges in early 2024. However, Hong Kong accounts for a larger portion of this smaller pie, delivering 39% of IPO proceeds in 4Q24 and 30% in 30% in 1Q25. Over the prior eight quarters, its average share was just 5%, according to AVCJ Research.

Recent listings include various consumer plays such as beverage brands Mixue, Goodme, and Auntea Jenny, along with toy maker Bloks. These delivered liquidity events for the likes of Hillhouse Investment, CPE, Vision Knight Capital, and Longzhu Capital. Last week, restaurant chain Green Tea went public, enabling Partners Group to make a partial exit.

As of 19 May, 123 companies were in the queue for Hong Kong IPOs, among them noodle specialist Xiao Noodles, fast-food chain operator LXJ, and discount snack retailer Busy Ming.

The US remains an attractive listing destination and the recent NASDAQ IPO of milk tea brand Chagee demonstrates the geopolitical neutrality of consumer brands. Nevertheless, the company’s 22.8x price-to-earnings (P/E) multiple – compared to 35.2x, 37.2x, and 26.2x for Goodme, Mixue, and Auntea Jenny – suggests US investor reticence, according to a source familiar with the situation.

Forced delisting of Chinese companies trading in the US, which was floated by certain US policymakers, remains a concern. Chen of Centurium downplays the chances of unilateral action, observing that companies will opt for US markets for commercial reasons, based on industry-specific or situation-specific considerations. That said, there is a need for alternative solutions.

“From a long-term perspective, China should focus on developing its own international capital markets,” Chen observed.

Selling the story

Meanwhile, consumer stories continue to attract certain investors to China, from Mubadala Investment, L Catterton, and Advent International to FountainVest Partners, DCP, and Trustar Capital. Most are betting on the country’s strong fundamentals outlasting near-term uncertainty.

Explaining its participation in a PAG-led USD 8.3bn acquisition of shopping mall operator Newland Commercial Management – a restructuring of an earlier deal predicated on an IPO that didn’t happen – Mubadala noted the resilience of “experience-based businesses” in the tenant register.

Scott Chen, a managing partner at L Catterton, claims to have taken advantage of recent dislocation to make three investments over the past 12 months on “especially favourable terms.” They include plant-based beverage producer Viee and body care brand Stenders.

Andrew Li, a managing director at Advent, added that China remains a strategic market for the firm and its activity in the country over the past decade has been consistent. Two China deals were announced last year: OEM Seek Pet Food and trade show business VNU Exhibitions Asia.

These interviews are infused with references to China’s mega trends, including urbanisation, a growing middle class, and an ageing population. Evolving consumption patterns – increased attention to healthy lifestyles and longevity, a preference for cost-efficient products, and a shift toward services and experiences – characterise these phenomena.

An instinct to save rather than spend, demonstrated in China’s household savings rate being at an all-time high, is often cited as an obstacle. To Andy Bao, a managing director at GenBridge Capital, it is evidence of unmet consumer needs rather than weak consumption demand. This implies untapped potential and therefore investment opportunity.

Luckin Coffee was founded in 2017 to harness an emerging coffee consumption trend and a digitally enabled business model. Three years in, accounting fraud threatened to derail early progress, but the company has rebounded. Revenue has increased 159% and the store footprint has grown more than threefold, reaching 24,097, since 2022, in spite of a stalling Chinese economy.

“A company should adopt a consumer-centric perspective and position itself appropriately. On one hand, not to pursue excessively high profits. Meanwhile, it must build entry barriers to prevent the market from becoming a saturated red ocean,” said Chen of Centurium, Luckin’s majority owner.

Centurium started out as a minority investor in Luckin, only assuming control in a post-scandal restructuring. While that circumstance was exceptional, there is a general view that buyouts will become more prevalent in China – a function of a maturing economy and investors wanting to ensure business models are sustainable and companies can be exited.

DCP’s acquisition of Sun Art Retail is a high-profile example of a corporate carve-out, and Starbucks China would reinforce this trend, should the US-based parent proceed with a sale. Other buyout archetypes include take-privates and founder succession situations, recently exemplified by Trustar’s bid for US-listed power bank player Energy Monster and L Catterton’s acquisition of Viee.

In several situations, notably Seek Pet Food and FountainVest’s acquisition of pet dietary supplements supplier Hongrui Biotech, buyouts have facilitated exits for existing minority investors left hanging in a difficult IPO market.

Buy well, buy global

Control deals remain relatively sparse for reasons ranging from GP execution capabilities to different valuation expectations. Asked about bridging the valuation gap, Advent’s Li described it as part art, part science. “It’s a combination of business model, market, and sector, and how the business plays out in downside, base-case, and upside scenarios. It’s not so much a mathematical game,” he said.

Advent will also consider certain China-specific criteria, such as whether the strategic value of the asset means that, on exit, it is better suited to a foreign or domestic buyer. The firm’s investment committee is likely to be more sensitive about China-for-global deals than China-for-China deals “as a way to shield ourselves from macro volatilities,” Li explained.

Asset selection remains crucial, in terms of geopolitics and competitive positioning within China. But Alex Zhang, a founding partner at Hosen Capital, is encouraged by the more buyout-friendly environment, including regulation. This covers policies encouraging M&A, which can benefit private equity on exit, and – to some extent – stricter guidelines on valuations.

“If the company is growing and the market is good, you should pay a premium when you are doing acquisitions, which is not well established with the regulatory framework,” Zhang said. “The lack of liquidity and PE-to-PE deals don’t help because we don’t have a full set of comparable valuations.”

The consumer buyout thesis also extends into other markets, either supporting overseas expansion by domestic companies to enable revenue and supply chain diversification or helping ex-China businesses access local markets and expertise. Offshore assets present more exit optionality as well.

FountainVest has firmly embraced this philosophy, backing sporting goods, pet food, and jewellery businesses across Europe, New Zealand, and Japan. Hosen ventured into Australia, picking up beef processor Kilcoy Global Foods and pet food manufacturer Real Pet Food.

Kilcoy, which Hosen moved into a single-asset continuation vehicle in 2022, is now preparing for a US IPO. An earlier listing attempt in Australia was thwarted by Chinese restrictions on beef imports. While noting that shipments to the US and China have increased despite trade tensions, Zhang maintains that Kilcoy is now sufficiently diversified to withstand pressures in individual markets.

“Any volatility in the supply chain could negatively impact the company. However, this may also create windows of opportunity for us. We are multi-supply and multi-market, so we can easily deal with disruption,” he said.

Taking consumer businesses into new geographies presents challenges around product-market fit. Before buying Real Pet Food, Hosen broke down China’s pet food industry into five segments and identified the super-premium and ultra-premium categories as lacking strong domestic supply. For Kilcoy, the emphasis was on aligning with management on complementary bolt-on acquisitions.

Partnerships with financial or strategic investors familiar with target markets are also helpful. FountainVest teamed up with China’s Anta Sports to buy Finland-headquartered Amer Sports in 2019, recognising the need for help on pricing and value creation.

Primavera is a minority investor in Breitling, a Swiss luxury watchmaker controlled by Partners Group and CVC Capital Partners. China is the company’s fifth-largest market, and it is looking to make further inroads by leveraging local digital infrastructure and social media channels. Primavera can contribute to these efforts through its experience in the country’s consumer sector.

“If there are partners with the right resources and knowledge about a particular market – for example, China’s consumer retail market – we are very open to working with them,” said Sheng Liu, a managing director at Partners Group and head of the firm’s Shanghai office.

“For Chinese GPs looking for opportunities in Europe, they also need to have a clear value-creation strategy before investing. What will you do with that business? Will you bring it to China? Or do you have Chinese businesses that can collaborate with it? They need a very well-defined strategy.”

Growth paradigm

Anta featured in another partnership with private equity in 2023, when the company’s founder joined ZWC Partners and other investors in the acquisition of Italian luxury bedding business Frette. ZWC’s roots are in venture capital, but it is not alone in looking at consumer opportunities.

Some LPs are broadly supportive, with Xiaoxuan Wang, an investment director in Schroders Capital’s private equity team, noting that the sector can deliver compelling venture capital and growth-stage deals. He believes GPs should consider deepening their consumer exposure to take advantage of policy tailwinds.

XVC has seen the early-stage story play out with Chagee. It led the company’s debut funding round in 2020 when Heytea was still the runaway market leader. Chagee gained an edge by focusing on profitability, not just scale. It moved into the black with only 200 outlets (there are now 6,500). Boyu Hu, XVC’s founder, observed that product-market fit is key to achieving sustainability.

BA Capital, a growth-stage investor that sees buyout as a long-term option, takes a similar line. It has focused on high-efficiency businesses in lower-tier cities and experience-heavy offerings for the more affluent. Pop Mart is the portfolio stand-out. The now Hong Kong-listed toymaker, which has seen revenue and net profit grow 2.8x and 6.5x since 2022, is notable for its strong intellectual property and cross-border appeal.

Pop Mart’s continuous product – and content – innovation has enabled it to build a lasting emotional connection with consumers spanning different demographic groups as well as different geographies. VC investors recognised this potential early on; most others did not.

“Most of the private equity industry, including myself, doesn’t have a very good understanding of Pop Mart. It belongs to a much younger generation and it is a brand-new category, although Japan and Korea saw similar developments,” said Zhang of Hosen. “It’s a very good that you could have that kind of industry leader maintaining growth in new markets.”

This success arguably underlines how the consumer thesis – at least for early and growth-stage investors – has moved on from expansion-at-any-cost. Capital efficiency and market adaptation are the new watchwords. Centurium’s Chen admits that Luckin-style capital-driven scaling has been consigned to the past as strong brands gain momentum without resorting to financial steroids.

“A modest amount of capital is enough to validate the business model or develop the product to generate cash flow,” he said. “For consumer companies, we believe more opportunities exist in mid-to-late stages – either when they need rapid scaling with product-market fit, or when pursuing industry consolidation.”