Private stake investors trapped in China as top firms fall short to discover exit deals

The globe’s biggest private stake groups have been unable to sell or list their China-based holdings companies this year, as Beijing’s crackdown on initial community offerings and a slowing economy leave foreign investors’ fund trapped in the country.

Among the 10 largest global private stake groups with operations in China, there is no record of any having listed a Chinese business this year or fully sold their stake through an M&A deal, figures from Dealogic display.

It is the first year for at least a decade where this has been the case, though the pace of exits has been leisurely since Beijing introduced restrictions on Chinese companies’ ability to list in 2021.

purchase groups depend on being able to sell or list companies, typically within three to five years of buying them, in order to generate returns for the superannuation funds, insurance companies and others whose money they manage.

The difficulties in doing so have in result left those investors’ funds locked away, with upcoming returns doubtful.

“There’s a growing sense among PE investors that China may not be as systemically investable as once thought,” said Brock Silvers, chief executive of Hong Kong private stake throng Kaiyuan fund.

He said firms were facing “weakened exit strategies on multiple fronts” in China, including being affected by a slower economy and domestic regulatory pressure.

Many private stake groups expanded their presence in the globe’s second-biggest economy as it grew rapidly over the history two decades. Global superannuation funds and others ploughed fund into the country, hoping to gain exposure to its economic boom.

The 10 firms invested $137bn over the history decade, but total exits amount to just $38bn, Dealogic data shows. recent resource by those groups has collapsed to just $5bn since the commence of 2022.

The pace of purchase groups’ exits from deals globally has also been slowing. It was down 26 per cent in the first half of this year, according to a update by S&P Global.

But the halt in China exits is particularly stark. It has helped make some superannuation funds that allocate liquid assets to private stake groups warier of exposure to the country.

“In hypothesis, you could buy cheaply [in China] now but you require to inquire 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 superannuation fund that is not currently investing in the country.

A elder executive at a major resource throng that commits liquid assets to private stake funds said they were “not expecting a lot of exits for the next couple of years at least” in China.

The data covers Blackstone, KKR, CVC, TPG, Warburg Pincus, Carlyle throng, Bain fund, EQT, Advent International and Apollo, the 10 largest purchase groups by funds raised for private stake over the history decade, excluding those that have done no deals in China. The data does not include Blackstone real estate deals.

Private stake firms sometimes buy or sell companies without disclosing it, and any such exits may be missing from the data. The firms declined to comment.

The hardship in cashing out has been one of the main factors deterring international purchase groups from making investments in the country, in addition to Sino-US tensions and the economic slowdown.

Jean Salata, founder of Barings Private stake Asia, which Stockholm-based EQT bought in 2022, told the financial Times in June that one rationale the “bar is high” for China deals was that investors were asking: “How straightforward will it be to get financial stability on those investments five years from now?”

Foreign purchase groups used to depend on taking Chinese companies community in the US or other countries in order to exit their investments after a few years. But Beijing has introduced recent restrictions on offshore listings since cracking down on the ride-hailing app DiDi, in the wake of its recent York IPO in 2021. Listings have slowed significantly since.

In total this year, there have been just $7bn of domestic IPOs in China as of late November, compared with $46bn last year, which was already the lowest total since 2019.

The crackdown has left purchase groups searching for other options, such as selling their stakes to domestic and multinational companies and to other purchase groups. But overseas buyers are sometimes reluctant, in part because of closer US political scrutiny of the mainland.

One of the few recent exits among the 10 firms came when Carlyle sold its minority stake in the Chinese operations of McDonald’s back to the US quick-food retailer last year.

In China’s boom years before the Covid-19 pandemic, there were dozens of exits through both listings and mergers and acquisitions, and foreign private stake played a much bigger role in driving mainland activity.

Goldman Sachs chief executive David Solomon said at a Hong Kong conference in November that one of the reasons investors were “predominantly on the sidelines” over deploying funds in China was that “it’s been very challenging . . . to get fund out”.