In 2012 only 4 percent of the roughly $30 billion in volume for the buying and selling of existing private equity fund stakes involved the transfer of China-focused portfolios, according to Palico estimates.
Demand for China-focused private equity funds has traditionally been higher than actual transfers, largely because the supply of funds focused on what is one of the world’s hottest emerging market has been limited. But there are harbingers of imminent change that could see the market share of China funds sold on the private equity fund secondary market as much as double in 2013.
China First Capital published a report last week showing that China’s private equity funds own 6,584 companies acquired over the last six years. That amounts to 82 percent of all private equity acquisitions made in China since 2007. Nearly two-thirds of those unrealized investments are at least three years old, according to China First.
By the standards of the Chinese private equity industry, that’s getting very long in the tooth, particularly in the local currency renminbi sector, where targeted hold periods average two years. Renminbi funds have seen their assets under management go from virtually nothing six years ago, to 35 percent of private equity value, with dollar-denominated assets accounting for 58 percent and other currencies 7 percent.
Expectations of 40 percent-plus IRRs over a three to five year effective portfolio life are not unusual among LPs in China funds. As one prominent secondary fund specialist recently said, given the high expectations many investors have for their China funds, “a lot of LPs are becoming increasingly underwhelmed” by the unrealized investments in Chinese funds. “An even mildly disappointing fund has a large chance of being sold.”
Moreover, according to a range of industry estimates, Chinese high net worth individuals account for between 15 and 19 percent of limited partners in China-focused funds - at least triple the market share of HNWIs on a global basis. These investors tend to be new to private equity and are likely to prove even more impatient with long hold periods than institutional investors.
All of this means 2013 may be a very good year to shop for top quality, used Chinese private equity.