“Private Equity Investors Unfazed by China’s Market Volatility” by Shasha Dai of LBO Wire featuring Ben Wiley and Eric Zoller
Private equity investors, however, seem unfazed by the news headlines or [China]’s actual growth rate, at least for now. Investors said Chinese stock markets aren’t a reflection of the real economy because stock prices are subject to government intervention, as January’s rout has shown. A short-lived circuit-breaker system meant to reduce market volatility had exactly the opposite effect, prompting its cancellation just days after its adoption. Meanwhile, some investors say the current market downturn in China presents buying opportunities as company valuations come down from frothier levels. The prospect for distressed investing is also greater as debt-laden businesses are hit by sliding revenue and cash flow.
“There is a difference between what’s going on in the markets over the last few months and the real economy [in China],” said Ben Wiley, a partner with placement agent Sixpoint Partners who heads the firm’s Asian practice. “Directionally, the real economy is a lot stronger than if you just follow the major stock indexes.”
Mr. Wiley added that many funds his firm has spoken to said they had expected the market retreat.
“[Stock prices] had gotten ahead of themselves,” Mr. Wiley said.
The greater appeal of China’s consumer-led sectors is also evident in fundraising activity.
Eric Zoller , co-founder and partner of Sixpoint Partners , said although overall fundraising volume for Asian-focused funds declined about 70% last year over 2014 levels, there has been plenty of interest from investors in funds focused on the Chinese consumer sector, as well as those seeking distressed debt or special situation opportunities.
Baird Capital’s Mr. Tucker said valuations for new rounds of funding for fast-growing Chinese businesses have come down even for consumer-oriented sectors, which Mr. Tucker calls the “new China” economy. “If the new China growth company fundamentals are still there, and broad China fear is reducing valuations across the board, then…this is good news for new investments,” said Mr. Tucker. “It should be a buying opportunity.”
The same is true for secondary investors, said Sixpoint’s Mr. Zoller. Lower stock prices narrow the window for new stock offerings by private equity-backed companies, leaving the sponsors with fewer exit options. That led to longer holding periods for the sponsors, Mr. Zoller said. Investors in those funds are therefore seeking quicker liquidity on the secondary market.
Over the last six months or so, Sixpoint has received more inquiries than usual from both buyers and sellers of secondary interests in Asian-focused funds, the firm said. Pricing of secondary interests is also more attractive.
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