International fundraising slumped in China last year as regulatory risk and geopolitical tensions scared away investors. Pan-Asian private equity funds are seeking out alternatives whether those investors return or not.
This article first appeared in the February 2023 Asia Insights Report
International fundraising slumped in China last year as regulatory risk and geopolitical tensions scared away investors. Pan-Asian private equity funds are seeking out alternatives whether those investors return or not.
Global private equity investors are retreating from China amid rising geopolitical tensions with the US, forcing fund managers to tap local sources of capital and pivot into other parts of Asia.
Despite finally emerging from the shadow of a strict zero-Covid policy, international capital flows are unlikely to return to pre-pandemic levels amid a wider decoupling where US President Joe Biden wants to ban investing in Chinese technology companies and increase scrutiny of others.
“There has been a slight improvement in LP sentiment towards China as the government has moved away from its ‘dynamic zero-covid’ policy in recent weeks [and] we continue to see many LPs remain constructive to the opportunity in Asia, with international LPs starting to resume travel to the region after a long hibernation period during the pandemic,” says James Shipperlee, managing director at placement agent Campbell Lutyens in Hong Kong. “However, the ongoing challenges facing China, both in terms of geopolitical concerns and regulatory uncertainty, are causing LPs to diversify into other segments of the [Asian] market.”
From a dramatic USD fundraising decline that began in Q4 2021, Greater China-based private equity funds raised only $36.3bn in 2022, according to Preqin – just 28% of what was raised in 2021.
“For GPs raising funds with a pan-Asian strategy, certain LPs have requested that the fund’s allocation to China be reduced and/or capped at a certain proportion of the fund [and] we are seeing increased interest in pan-Asian funds which are able to minimise their exposure to China as well as GPs focused on Southeast Asia, Japan, South Korea and India in particular,” says Shipperlee.
China chill
In a global survey by Private Equity Wire in January, only 14% of managers responding selected China as the most attractive destination for investment in Asia, ranking it third behind India and south-east Asia. The same survey also found regulatory risk and macroeconomic environment to be the two main deterrents to investing in Asia as a region.
Given the US-China tensions, North American pension funds are currently the most cautious on China, while European institutions are looking at the situation through more of a commercial lens, says Andy Wang, partner at Adams Street Partners in Beijing. The head of the Washington State Investment Board Allyson Tucker was recently reported as saying, “I happen to believe the US-China rivalry will be one of the dominant themes of our times. As a global investor, we have to think about whether or not we continue to be allowed to invest in China. Right now, we have exposure in every single one of our asset classes. It used to be a much larger part of our portfolio than it is today.”
Canada’s Ontario Teachers’ Pension Plan (OTPP) has paused future direct investments in private assets in China due to geopolitical risk, it was reported in February. Singapore’s sovereign wealth fund GIC has also pulled back from China after it was badly burnt by an investment in Ant Group, whose planned $37bn initial public offering was halted by Chinese regulators in 2020, according to The Financial Times.
Waiting for growth
But not everyone is down on China and, for those that are, many see the current pause as temporary or even reversible once China’s economy returns to stronger growth. Middle East investors are active and positive on China while international family offices and private wealth investors are more flexible [than institutions], says Wang. The same GIC news report in the FT also quoted a source as saying: “Don’t be surprised if [GIC are] among the first to come back… they know China much better than others.” A statement by GIC following the FT story said it continues to search for long-term investment opportunities in China.
“Investors like to stay a little bit away from China market but it’s not really a long-term plan,” says Won Ha, managing director at Ardian in Singapore, citing the end of this year or next year for their potential return. “Most of them will plan to increase their exposure to the China market when the market recovers so my view is that this is pretty much temporary. They want to see a feasible and very concrete recovery signal from the China market, then they will start to allocate their capital.”
Geopolitical signals
Such signals could be economic or political: economists predict China’s economy will return to growth of more than 5% later this year (longer-term outlooks differ); and China’s potential role as mediator (or aggressor) in the Ukraine war could also jolt relations with the US. Some foreign policy signals may not fit the established geopolitical narrative. At the end of last year, China’s National Development and Reform Commission and Ministry of Commerce issued a 2022 edition of the Catalogue of Encouraged Industries for Foreign Investment which came into effect in January. China’s industrial and supply chains and its central, western, and northeastern regions were identified as key channels for foreign investment. Chinese officials have also said publicly that a regulatory crackdown that began in 2021 and wiped billions of dollars of value off Chinese technology companies is over.
Jonathan Zhu, partner and co-head of Asia for Bain Capital Private Equity told Bloomberg in February that he expects China’s private equity market to recover this year, though to a lower level. He cited the end of zero-Covid, an expected recovery in consumer sentiment, and a rebound in Chinese stock markets as tailwinds.
In the meantime, pan-Asian fund managers with coverage across the region can adjust target country weightings (on paper at least) and limit LP exposure to China (where possible). Bain Capital invested around half of its first two Asia funds in China, but a smaller percentage of its larger third and fourth funds, noted the same Bloomberg report. BPEA EQT, formed by the merger of Sweden’s EQT and Baring Private Equity Asia last year, raised one of the largest ever pan-Asian private equity funds at more than USD 11bn last year. It told Private Equity Wire it remains “fundamentally bullish on China in the long term” but in the near term is “assessing new investment opportunities carefully”.
So far, established pan-Asian funds have found their investors to be generally accommodating to changes in tack, where geopolitical or regulatory risk has been cited, says Robert Petty, co-CEO and co-CIO at Fiera Capital (Asia). If China decouples from the global fundraising market more permanently, those fund managers have two further options: to raise funds in local currency (see box page 11) or to launch alternative country funds in Asia, targeting India or Japan for example. Whichever outcome is decided, the prominence of China in global fundraising circles seems unlikely to be restored to the same level anytime soon.
“The economic globalists that led the economic change in China, that is over,” says Petty. “How we used to think about everything in Asia being driven by the economic growth of China, that is over. Now it’s ‘What am I doing in Japan? What am I doing in Australia? What am I doing in Indonesia’ and that specificity of country is much clearer and cleaner – people are getting laser-focused on sector or country and the fundraising that you’ve seen around particular themes is being exponentially driven by what’s going on in Asia.”
