APAC investors shun China private equity
On the face of it, strong investor flows into China’s private equity markets so far this year suggest recovery from the global headwinds and low deal volumes that have plagued the industry in APAC and across the world in recent years.
But closer scrutiny of the data shows that the vast majority of allocations are coming from state- and SOE- demand, while private investors across APAC avoid the sector, according to investors and advisors in the region.
Tim Burroughs, of Asian Venture Capital Journal (AVCJ), a private markets data and publishing company in Hong Kong, pointed to the sharp contrast between private equity fund raises onshore in China and depressed APAC demand for dollar denominated APAC private equity funds.
$159 billion flowed into renminbi-denominated private equity funds across APAC in the year to early December, dwarfing the $68 billion that has flowed into US-denominated deals in the region, according to data provided by AVCJ to AsianInvestor.
“But renminbi funds exist in a different world: most of the money comes from government entities and it goes into policy-linked vehicles that don't necessarily compete with US dollar funds. And they only invest in China. Fundraising, including in China, when viewed in the proper context, is very poor,” Burroughs told AsianInvestor.
Both APAC and global investors continue to shun China currently. 78% of APAC investors say that Asia ex-China will be the best emerging market opportunity for 2025, and 55% said that India will surpass China as Asia’s leading emerging market, according to Natixis IM’s Institutional Investor Survey 2024, published December 5. The survey polled 500 institutional investors, who collectively manage $28.3 trillion, including 72 in Asia, managing $6.7 trillion in all.
Only 16% of global investors believe China is the best emerging market investment opportunity for 2025, according to the survey.
CHINA BULLS AVOID PRIVATE MARKETS
Sky Kwah, head of investment advisory at Raffles Family Office in Singapore said that, among the discretionary portfolios it manages for major private asset owners, it was cautiously maintaining its China allocations.
“This places us [at odds] with weakening global investor sentiment which – driven in particular by the views of developed market investors – is excessively bearish, and sometimes underestimates China's long-term structural strength and its potential impact of domestic policy support,” Kwah told AsianInvestor.
But it is concentrating China’s public equity and fixed income markets because of the heightened risk and structural weaknesses of private markets in the country.
“China’s three main investment risks are: regulatory risk; the issue of corporate governance and lack of transparency, and the prevalence of SOE-influence. These features make private companies very unequal and the private markets riskier,” he said.
Kwah said its asset owner clients currently maintained allocations to China of around 5%, unchanged from a year ago.
Investors across the world are concerned about regulatory risk in China, with many agreeing with Kwah that China’s unpredictable regulatory environment disproportionately affects private markets. 79% of global investor respondents to the Natixis survey said that regulatory uncertainties made China less appealing.
Jo Huang head of Raffles private equity division in Hong Kong said that the avoidance of China’s sector came despite selective increases in allocations to private equity markets in APAC this year, which are planned to continue through 2025, for Raffles’ discretionary portfolios. Huang said these are intended to take advantage of the Fed rate tightening cycles in the US and the selective recovery of deal flow, particularly in AI and other technology sectors.
“In APAC, we are opportunistic in taking equity risks in Japan and Taiwan,” he told AsianInvestor.