Major private equity firms have faced significant obstacles in selling or listing their China-based portfolio companies in 2023, with Beijing’s tightening restrictions on IPOs and a decelerating economy having left foreign investors’ capital effectively trapped, according to a report by the Financial Times.
Citing data from Dealogic, the report reveals that none of the 10 largest global private equity groups operating in China have successfully listed a Chinese company or fully exited through M&A this year.
This marks the first such occurrence in over a decade, though the pace of exits has been sluggish since Beijing imposed restrictions on Chinese companies’ overseas listings in 2021. This has left significant amounts of capital locked in China, with uncertain prospects for future returns.
“There’s a growing sense among PE investors that China may not be as systemically investable as once thought,” said Brock Silvers, CEO of Hong Kong-based Kaiyuan Capital, highlighting the impact of regulatory pressures, economic deceleration, and weakened exit strategies on private equity operations in China.
Over the past decade, global private equity groups invested $137bn in China, yet have managed only $38bn in total exits, according to Dealogic. Since early 2022, new investments by these groups have reportedly dropped to just $5bn.
While the pace of global private equity exits has slowed overall, falling 26% in the first half of 2023, the situation in China is particularly severe. The difficulties in exiting investments have made some institutional investors, including pension funds, more cautious about allocating capital to the region.
“In theory, you could buy cheaply [in China] now but you need to ask what would happen if you can’t exit or if you have to hold it for longer,” said a private markets specialist at a large pension fund not currently investing in the region.
A senior executive at a leading investment firm predicted a dearth of exits from China for at least the next few years, further complicating the investment landscape.
The 10 largest private equity firms – Blackstone, KKR, CVC, TPG, Warburg Pincus, Carlyle Group, Bain Capital, EQT, Advent International, and Apollo – have seen their exit strategies severely constrained by Beijing’s new rules. These restrictions, introduced after the controversial New York IPO of ride-hailing giant DiDi in 2021, have made offshore listings for Chinese companies increasingly rare.
As a result, buyout groups have sought alternative exit routes, such as selling stakes to domestic or multinational firms or other private equity groups. However, overseas buyers remain cautious due to intensified US scrutiny of Chinese investments and geopolitical tensions.
Even domestic IPO activity has sharply declined. As of late November, Chinese IPOs raised just $7bn this year, a steep drop from $46bn in 2022, which was already the lowest since 2019.
During China’s economic boom before Covid, private equity groups enjoyed robust opportunities to exit investments through IPOs and M&A deals. Foreign private equity played a significant role in China’s financial landscape, facilitating numerous high-profile exits.
Today, the sentiment has shifted. At a November conference in Hong Kong, Goldman Sachs CEO David Solomon noted that many investors are now predominantly on the sidelines in China, citing the difficulty of repatriating capital.
One of the few notable exits in recent years came when Carlyle Group sold its minority stake in McDonald’s China operations back to the US-based fast-food giant. Such cases, however, are exceptions in an environment increasingly defined by regulatory and economic barriers.
