GP: RMB funds to grow but shakeout looms

As China’s high growth days come to an end, RMB fund size is growing, an industry shakeout is coming and value creation will be key to realising desired returns, according to the managing director of Carlyle Asia.

RMB funds are going to be far larger than they already are, said Xiang-Dong Yang, managing director, Carlyle Asia Partners.

Yang was speaking on private equity trends in China at the HKVCA’s Asia Private Equity forum in Hong Kong.

“[Domestic] institutional investors such as the insurance companies and social security funds really don’t have much exposure yet,” Yang said.

“They have hundreds of billions of dollars and [are allocating] 10 percent of money to private equity and that is going to make much bigger funds. I don’t think we’ve seen the peak of the RMB fund business yet.”

In 2011, RMB funds raised $26.4 billion or 60 percent of total funds raised in China, continuing a two-year growth trend, according to advisory firm PriceWaterhouseCooper.

Yang also addressed several trends in China, including the crowded field of private equity participants that he believes will lead to an inevitable shakeout. 

He told the apocryphal story about two private equity executives talking in a Beijing taxi when the taxi driver turns around and says, “You're in private equity? I’m also doing some private equity investing”. 

“That tells you we’re in a very low barrier-to-entry business,” Yang said.

In response to a question, he agreed there were parallels between the proliferation of private equity firms in China now and in Silicon Valley's bubble years of 2000-2001, when a variety of newcomers emerged and said they were either a VC, angel or private equity investor, leading to a significant shakeout. 

“I think there will be [a shakeout] but it will take them a bit longer [in China],” he said. “What I see happening faster is that the successful funds become bigger much faster. Then the industry will be more consolidated numerically in terms of AUM [assets under management].”

He also warned about the growing presence of relatively new LPs investing in RMB funds without investment experience.  

“Not institutional LPs, but a different cast of characters who think this is the way to make money,” Yang said. “We’re concerned people will make mistakes and maybe government will get more involved and the whole industry will be impacted.”

From a broader perspective, China is at a transition point and the years of high growth are coming to an end. “Ten percent plus GDP growth in China will never be here again and that’s kind of scary,” he said. 

“At 10 percent growth, if you were smart enough to find a company that can grow 2-3 times the GDP growth you could get the 25-30 percent return,” Yang said. 

“But if GDP grows 7-8 percent, how do you to get that magic 25-30 percent return without leverage? That is the reality we’ll be facing.”

Private equity firms will cope with slowing GDP growth by tighter and deeper sector specialisation and through a focus on value creation – making meaningful and measurable operational changes to companies to help them grow long term. 

Although the trends he cited have negative connotations, the basic story of China remains intact, Yang said. “China is one of the most attractive places for private equity, but not everyone will be successful.”