The Chinese market is getting harder to crack for US and European private equity firms, according to Andre Loesekrug-Pietri, chairman and managing partner of A Capital.
Talking to Real Deals, Loesekrug-Pietri said that before 2009, the Chinese private equity market was dominated by foreign entities. Since then the emergence of a sizeable local institutional LP base, all appearing at the same time and hungry to deploy capital in the asset class, created a massive opportunity for local firms.
While foreign firms have to register with Chinese regulators to operate in the country, a process that can take months to complete, local players have few regulatory impediments. In addition, foreign firms have to compete with the growing clout of homegrown corporates and entrepreneurs.
As competition has increased, valuations have rocketed. Speaking earlier this year, Simon Borrows of 3i announced the firm was withdrawing from the Chinese market, which he called “competitive and unattractive”.
While many Chinese corporates are still growing revenues, many are struggling to turn a profit. “There is a misperception that everything is going well. These companies are growing fast, but the return on equity is terrible,” said Loesekrug-Pietri. In the last quarter, one third of Shanghai-listed Chinese companies were not profitable, he added.
Loesekrug-Pietri has set up A Capital, which invests in European companies to expand in China. “From a risk perspective, we are investing in companies with European valuations and standards of corporate governance, which are much more attractive than what you often find in China, but benefiting from the Chinese upside,” he said.