Venture Capital and Private Equity Opportunities in China

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By Paul Salo
Shanghai

It is a common misconception that excess liquidity in the Chinese market as a whole eliminates opportunities for private equity investors in China.   The liquidity that exists in china due to the massive government stimulus package and forced bank lending of 2009 and 2010 simply does not reach the small and medium private enterprises.  In fact, less than 15% of recent bank lending has been to private enterprises in china.  These successful and profitable winners in the market are dying to see an infusion of capital and are now willing to look at foreign investment.  Some private firms are allowing themselves to be absorbed by money-losing state owned enterprises in order to meet short-term financial obligations. This has been the case in several industries such as steel and cement. In the PRC, the need for capital in private enterprises is real.

The intense focus of the Chinese government on supporting state owned enterprises alerted me to an opportunity in the market.  In my view, there are many opportunities to invest in China than existed prior to today.  In my view, China, as a market, is becoming more efficient on a daily basis. That said, it is not to say it’s easy for private equity or venture capital firms to differentiate management teams and likely winners among the many “me too” software and Internet firms, for example.   In green energy, we have seen some extraordinarily high (unrealistic) valuations.

Efficient Equity sees opportunity in basic industries and everyday consumer necessities like food and beverage, toiletries and even agriculture.  On top of the opportunity caused by inefficient lending policies, we feel that foreign investors, private equity firms and venture capital will also profit from investing in Renminbi (Yuan) assets and see substantial capital appreciation.   It doesn’t take a crystal ball to see that investing in profitable small and medium enterprises in China earning Renminbi — companies that are not leveraged — puts private foreign capital in an advantageous situation as the Renminbi rises over time.

3 COMMENTS

  1. The Chinese game is quite different from the American game for PE firms on the whole. But I agree with most of what you said. There are opportunities in small ot mid-cap.

  2. Very interesting. I’ve worked in Silicon Valley and now in India. I think Chinese companies considering a liquidity event should look into private equity in India too. PE market is very strong

  3. There is no doubt in my mind the Chinese yuan will appreciate. We are dedicated to long-term investing and like prime CBD commercial properties at the moment

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