PAG, a leading Asia-focused private equity firm, anticipates attractive buyout opportunities in China’s market leaders which cater to the private consumption sector, according to Executive Chairman Weijian Shan speaking yesterday (19 Nov) at the AVCJ Private Equity Forum 2024 held in Hong Kong.

Shan believes the escalating trade war between China and the US could, perversely, be good to force the transition of China’s dependence on exports towards domestic consumption.

“China will have to shift in the direction of private consumption. That’s why I think that sector is very attractive,” Shan said.

However, the challenges faced by growth investors and venture capital investors to exit from the Chinese market are very severe today.

“The China market is very much a buyer’s market for buyout firms because the competition is much less,” Shan said.

Shan listed the example of its portfolio company Newland Commercial Management, a leader in shopping mall management that currently manages approximately 500 large-scale shopping malls across China. PAG, along with other investors had invested approximately USD 8.3bn in March.

“We bought about 60% of the company and at less than 10 times PE, and seven times EBITDA,” Shan said.

He emphasized that the low valuation is only achievable in the current buyer’s market in China. However, “You have to be in the buyout space because otherwise exiting would become a problem,” he said.

DPI not an issue for buyout funds

Due to the underperforming capital market in China in the past several years, exits have become extremely difficult for growth, venture, and angel investors. The average PE ratio for MSCI China is about 11 times. For Japan, it’s about 30 times. For India, it’s about 30 times, according to Shan.

Unlike the growth investors, DPI (distributions to paid-in) has not been a problem for buyout funds because they are able to sell their businesses through trade sales and don’t rely on the capital markets, Shan said.

“If you’re a growth investor, you’re a passenger. You exit where the bus stops or where the bus takes the exit. But if you’re a buyout firm, then you are the driver,” Shan said.

“When we make the investment, exit is pre-designed. Otherwise, we wouldn’t even make an investment because LPs need DPIs,” he said.

Bolder stimulus needed to lift confidence 

Shan pointed out that the Chinese people have enormous spending power, but they are reluctant to spend because of the negative wealth effect mainly due to the falling property prices in recent years.

“Housing is very important to turn around the expectation,” Shan said.

There needs to be bolder and more aggressive policies to send a stronger signal to the market to boost market confidence, according to Shan.

Shan is not bullish on the Chinese economy as the country is significantly underperforming its potential. Neither is he bearish on the Chinese economy as “China has more policy space than any other major economy in the world”.

Shan believes that the government has ample room on the fiscal side to further ease and expand support to the local economy.

“They made the announcement, they own it, they will have to deliver, and I believe they have the tools to do so,” Shan said.