Developing a private equity business in China

Abstract

The private equity business, a good complement to the public equity market and the debt market, has been playing an increasing role in China. However, there is no universal formula for doing this business. As an art rather than a science, it varies from country to country. After two decades of reform and open-door policy, Chinese enterprises are essentially the same as the ones in developed countries. The major difference lies in the different developmental stages and business environments such as the dominant governmental role in China, the lack of business leaders and the immaturity of financial market. This different business environment drives a different market structure including more venture investments than buy outs, more late-stage and pre-IPO investments than early stage, and more investment in private sectors than state-owned enterprises. As a result, the excess of investment capital focuses on the small market of late-stage investments with a high potential of IPO.

(cont.) Given the current business environment, I suggest three key investment strategies. First, bring the value to the companies in a competitive industry by providing business model upgrades, market knowledge, and disruptive technologies. Second, originate deals by helping the government to achieve its public goal of restructuring industry resources and accelerating Chinese enterprise globalization and modernization in regulated industries. Third, seek any possible investment opportunities provided by the immature financial market.