Private equity (PE) investors are preparing for a more buoyant market in China during the next 12 months.

More than 90 percent of PE investors surveyed by the professional services firm Deloitte said that investment activity in China's PE market will increase in the coming year, according to Deloitte's new "China Private Equity Confidence Survey."

Recent signs of global economic recovery, in some regards led by China's recovery numbers, have led to a shift in confidence levels, Deloitte said.

Executives who were surveyed said their optimism is based on a variety of factors, with "stock market upturn/ greater stability" (31 percent) and "better economic environment" (31 percent) listed among the top drivers.

Other reasons cited were "more liquidity" (19 percent) and "growing confidence in China" (12 percent), according to the survey.

"After a period of sitting on the sidelines during the more acute phases of the global economic downturn, PE investors are emerging to pursue the tremendous opportunities in China, and the sentiment among dealmakers is optimistic," said Lawrence Chia, a managing partner of financial advisory services for Deloitte China.

New platform

"Investment activity is expected to pick up in the near term and continue to increase, and the Chinese government is taking steps to provide clearer support and a new legal platform for domestic and foreign PE investors," Chia said.

Sixty-one percent of respondents to the Deloitte poll said they expect valuation multiples to increase significantly from 10 percent last year.

Seventy-five percent of respondents expect more exit options, of which 48 percent said the re-opening of the initial public offering (IPO) market will be the key driver.

Chia said the opening of the new Growth Enterprise Board (GEB) could be a game changer for PE investors interested in growth capital strategies.

The China PE community is more optimistic about returns, with 39 percent saying they expect returns to increase to levels above last year's 10 percent.

Another 39 percent of respondents expected returns to decrease in the next 12 months -- a number still significantly less than the 70 percent anticipating a decrease in last year's survey.

Both measures showed optimism around near-term rates of return. While the reasons for optimism are mixed, clearly respondents are looking for internal rate of returns (IRRs) to rebound after last year's performance, according to Deloitte.

Rapid growth

Chris Cooper, head of private equity for Deloitte Northern China, said the PE market in China has been growing rapidly in deal numbers, deal size and also the variety of players.

"The majority of survey respondents expect domestic equity investors to assume a dominant role in domestic acquisitions," Cooper said.

"But along with this trend, we are already seeing more shared, cooperative investments that benefit from the synergies of foreign and domestic skill sets," he said.

The survey group interviewed approximately 30 leading PE investors in China across all sectors of PE fund types between August and September, collecting market views on the development of the China PE market over the next 12 months.

Highlights

Here are the highlights of survey results:

*Increasing appeal of PE: A majority (97 percent) of respondents expected the overall level of investment activity to increase or stay the same.

*Type of investor: In a change from last year, 50 percent of respondents believed that the most active PE investors will be domestic PE fund managers, with the majority of the respondents indicating that domestic funds will increasingly win deal market share from foreign funds.

*Increase in returns: Thirty-nine percent of respondents expected the return on investment for PE firms to increase. They cited issues ranging from market improvement to an increase in IRR measures.

*Growing competition: Seventy-one percent of respondents expected competition in the PE market to intensify, largely driven by an increase in the number of RMB funds and local players.

*Average deal sizes: Fifty-seven percent of respondents expected deal size to stay the same, primarily due to the nature of the China PE market, which is primarily growth capital-oriented with consistent deal sizes.

(China Daily 10/19/2009 page8)