2014 has been a year for the record books concerning private equity. Global investment exits through initial public offerings accumulated two trillion US dollar and about 500 billion US dollar have been collected in private equity funds for future investments.
These impressive numbers show how important private equity has become in the international financial sector and China has evolved to one of the biggest private equity markets in the world. This raises the question of who is in power in the Chinese market? Giants like Goldman Sachs, Blackstone or Carlyle dominate the international market. So how are the domestic Chinese private equity firms doing? When China first heard of private equity in the early-1990s, it was already one of the biggest investment markets in the West, mainly in America. Hence, American companies had nearly no competitors in China and made fortunes in this recently opened market. Nevertheless, domestic firms developed quickly and challenged foreign companies to a duel.
This paper will be divided into two parts, firstly it will show the development of Chinese and foreign private equity companies and their shares on the Chinese market. The second part then will try to give an impression on possible reasons for the mentioned development. There won’t be any further explanations about private equity given in this paper, only if they are needed for deeper understanding of the context. However specific knowledge about private equity will not be needed since it won’t discuss specific features of it in detail. The aim of this paper is to answer the questions about how the market developed and the possible reasons for this.
Table of Contents
1 Introduction
2 Initiation of China’s private equity market and development until 2005
2.1 Development between 2004 and 2014
2.2 Fundraising by FOPE and COPE
2.3 Completed investments by COPE and FOPE
2.4 Short summary of private equity market development
3 Possible reasons for the declining market share of FOPE
3.1 Legal framework and regulations
3.1.1 Government agencies relevant for private equity
3.1.2 Red Chip structure or Round Trip investment
3.1.3 Other important regulations concerning FOPE and COPE
3.1.4 China’s stock market and IPO
3.2 Princeling-returnee constellation
3.3 Other influences
4 Conclusion
Research Objectives and Core Themes
This paper examines the shifting power dynamics within China’s private equity market, specifically focusing on the transition from a market dominated by foreign-owned private equity firms (FOPE) to one increasingly influenced by domestic counterparts (COPE). The research aims to identify the underlying reasons for this trend, exploring the roles of regulatory frameworks, political connections, and shifting market strategies.
- The historical development of China’s private equity sector from the 1990s to 2014.
- Comparative analysis of fundraising and investment completion between foreign and domestic firms.
- The impact of Chinese governmental regulations, including the role of the NDRC, MOFCOM, and SAFE.
- The strategic significance of the "princeling-returnee" constellation in local market success.
- The structural evolution of investment vehicles and exit strategies, such as IPOs and Red Chip structures.
Excerpt from the Book
3.2 Princeling-returnee constellation
In his book “Localizing Global Finance: The Rise of Western-Style Private Equity in China” from 2015, Justin Robertson set his wits to the question, how COPE were able to catch up so quickly on FOPE’s advance in knowledge and be able to compete with them on eye level.
He argues that domestic firms used replica localization and implemented the global private equity model. Besides many cases, were global firms adjusted their business models on the Chinese market or Chinese companies reshaped foreign business models to their needs, according to him, private equity in China has only gone through minimally modifications and supplants foreign actors.
Of particular importance is his so called “princeling-returnee” collaboration that is seen by Robertson as one of their most important competitive advantages. Without going into great details, princelings are relatives of past or present senior Communist Party officials, with those being the most powerful that have connections to political leaders. He referred to Bloomberg saying that more than 30% of important positions in the financial sector are held by princelings. This also concerns the private equity market. Boyu Capital, CITIC Private Equity Funds Management and New Horizon Capital can be cited as examples. These COPE rank among the most powerful COPE and are led by princelings. Yet while being linked to the most powerful politicians in China, they mostly lack knowledge and experience.
Summary of Chapters
1 Introduction: Provides an overview of the growth of the private equity sector in China and outlines the study's objective to analyze the competitive shift between foreign and domestic market participants.
2 Initiation of China’s private equity market and development until 2005: Reviews the early stages of market formation, the dominance of foreign firms, and the initial steps taken by domestic entities to enter the sector.
3 Possible reasons for the declining market share of FOPE: Analyzes the regulatory, political, and socio-economic factors that have contributed to the eroding market share of foreign-owned private equity firms in favor of domestic ones.
4 Conclusion: Summarizes the transformation of the market landscape and highlights the ongoing uncertainty and future challenges for foreign investors within the Chinese regulatory environment.
Keywords
Private Equity, China, FOPE, COPE, Fundraising, Market Development, Regulation, NDRC, MOFCOM, Princeling-returnee, Red Chip Structure, Venture Capital, IPO, Foreign Investment, RMB funds
Frequently Asked Questions
What is the primary focus of this research paper?
The paper focuses on the struggle for market supremacy in China's private equity sector, specifically analyzing the changing competitive dynamics between foreign-owned private equity firms (FOPE) and domestic Chinese private equity firms (COPE) between 2004 and 2014.
What are the central themes addressed in the analysis?
The core themes include the historical growth of the sector, the role of government agencies in shaping market access, the impact of specific regulatory policies on offshore investment structures, and the influence of political capital in domestic firm success.
What is the primary research objective?
The aim of the paper is to explain how the Chinese private equity market transformed from a foreign-dominated landscape to one where domestic firms have achieved significant growth and competitive parity.
Which scientific methods or analytical approaches are used?
The author employs a comparative analysis of fundraising data and completed investment values between foreign and domestic firms, while incorporating existing academic literature and industry reports to assess qualitative factors like regulation and political networks.
What does the main body of the work cover?
The main body covers the chronological development of the market, detailed breakdowns of fundraising and investment trends, an in-depth examination of the regulatory hurdles (such as the impact of NDRC and SAFE), and a discussion on the "princeling-returnee" phenomenon.
What are the key terms that define this work?
Key terms include Private Equity, China, FOPE, COPE, Red Chip Structure, Princeling-returnee, and Market Supremacy.
How does the "princeling-returnee" constellation influence the market?
This collaboration acts as a competitive advantage where the political connections and influence of "princelings" are combined with the international financial expertise of "returnees," allowing domestic firms to better navigate the Chinese market and secure regulatory approval.
What role does the regulatory environment play in FOPE's market decline?
Regulations such as the Foreign Investment Industrial Guidance Catalogue and specific circulars (e.g., Circular 698, Circular 10) have restricted foreign firms, made offshore structures more difficult to use, and forced a shift toward onshore, RMB-denominated investments which favor domestic players.
- Quote paper
- Johannes Gmeiner (Author), 2016, Private Equity in China. The struggle for China's private equity market supremacy between foreign and domestic market participants, Munich, GRIN Verlag, https://www.grin.com/document/438753
