Chris Lerner of Eaton Partners, which opened an office in Shanghai in 2007, says: “Private equity in a developing market like China, although less liquid, is not unlike other asset classes. You tend to have more exaggerated swings in sentiment and capital as things evolve; I don’t think private equity is any different in that regard.”
He says there are other factors affecting the market, including “structural financing imbalances, policy-driven directives, liquidity constraints, and relatively immature capital markets”.
Lerner also talks about the need for increased appreciation of the private equity asset class. He says: “Onshore [in China], I do think some structural things need to change, and this relates both to investor expectations and the mindset of certain GPs [general partners]. A better appreciation and understanding of the private equity investment model is needed and the fiduciary responsibility that goes along with that.”
He adds: “Private equity is quietly but increasingly becoming recognized as an important tool in the market overall. With the newly issued view for the way forward coming out of Beijing, I wouldn’t be surprised if there wasn’t an increasing open-mindedness and willingness of the industry and government for private equity to play a greater role in the transformation of the economy.”
Lerner says: “To build a long-term business as opposed to just raise a fund, I think, is the next phase of private equity.” He also notes that entry valuations and underwriting assumptions are a way to better assess the likelihood for consistency of performance in a dynamic environment.
Lerner says: “Given the uncertainty in the current environment and the heightened level of scrutiny from investors, where we’ll see demand in a market like this is from right sized’ funds that are focused and have differentiated strategies investing a manageable amount of money with a clear, repeatable investment process. The challenge is that the investment landscape keeps evolving, new managers keep spinning off and fund sizes of the established managers keep growing, so it is challenging to find and properly assess track records.”
Lerner thinks there is the possibility of this capital being allocated to other investments, but also acknowledges domestic investors have limited options and have to wait for distributions to come back from private equity investments. He says: “Traditionally, most private capital would go into real estate as a store of value because onshore money doesn’t have a lot of places to go. For those now invested in private equity funds, the money has to first come back.” He expects to “see a greater diversity of strategies and product.”
Lerner acknowledges the industry faces challenges, but is bullish about the long term. “Broadly speaking, the trend offshore is a gradually increasing allocation to Asia and China is a large part of that.”
The full article can be found here: China Private Equity in Transition
Back to News