Interview on China’s Private Equity Market – Centurium Capital

Today I am interviewing Fei Yiming on the outlook of China’s private equity market. Fei is a good friend of mine from graduate school. He recently joined Centurium Capital, one of the top private equity firms in China. (Congrats on the new job!) 

On China’s Private Equity Market.

Fei: China's PE market is growing rapidly. The transactions will continue to increase, covering everything from founder succession to business divestiture, from market entry and exit of multinational companies to the privatization of listed companies. I expect that international and local investors will continue to seek to enter China, the world's second-largest economy. Driven by this factor, and as companies continue to mature, China's PE market as a proportion of GDP will gradually catch up with more developed markets.

On China's slowdown in GDP growth and PE Fundraising.

Fei: The slowdown in economic growth will not slow down the growth of China's PE market, but it may have an impact on transaction types. Specifically, there will be more holding transactions. In the past, when the market grew rapidly, just participating in the market could create a lot of value. Today, as economic activity weakens, growth may no longer be 30%-40%, but 15%-20%. While compliance, labor, and environmental costs continue to rise, market competition is still intensifying. Profit margins are shrinking, so the rate of profit growth is not as fast as before.

Industry professionals realize that to create value, it must be improved at the operational level. In addition, as various industries mature and integration begins to appear, the company becomes more competitive. Therefore, entrepreneurs are more willing to give up control and find partners to help them realize their operational value.

In terms of fundraising, I believe seeing a similar trend. Limited partners (LP) gradually shift their capital from growth investment to holding investment, instead of betting solely on the growth of the overall market. Studies have shown that the return rate of the PE market is higher than that of the open market, but the differences between managers are also greater. The choice of a general partner (GP) will become more important in the future.

On the Impact of Covid-19.

Fei: Speaking of the Covid-19 crisis, many people believe that it will be a repeat of the global financial crisis in 2008 and 2009. At that time, the lack of market liquidity led to a decline in company valuations, which proved to be attractive to private equity investment.

The market conditions in this crisis are somewhat different, and PE companies have been very busy. Many PEs have sufficient liquidity and are actively looking for trading projects because they believe that the new crown epidemic will make everything cheaper. But many asset owners, including shareholders and founders, have realized that the epidemic crisis is fading. They are eager to exit, but at the same time, they believe that the value of their company is not lower than before the crisis, especially when the capital market is so liquid. There are valuation differences between buyers and sellers, so it is difficult to judge whether all these PE activities can be transformed into actual transactions.

On the Impact of the China-US Trade War.

Fei: The Sino-US trade dispute has made some long-term trends that appear early and accelerate development. For example, China's domestic consumption will play a leading role because people cannot predict what will happen to international trade in the future, and the Chinese government also wants to promote consumption to achieve sustainable growth. In such an uncertain market, having control of the invested company is particularly important for creating value. PE firms will continue to focus on specific industries such as healthcare, consumption, business and consumer services, and education in order to leverage strengths.