China's lower-tier market holds untapped potential for PE

Days are gone for low-hanging fruits in China for private equity investors, according to participants at the Future of China PE panel at the Asia private equity forum. But there's still significant potential in the consumer market, particularly in lower-tier cities.

 

In the past, there was sufficient capital in the market, so investors could take advantage and cash out in initial public offerings (IPOs) but such days were over, according to Robert Chang, founder and managing partner at GenBridge Capital.  

 

Despite consumption remaining weak in China, consumers in less developed Chinese cities are now the new targets for private equity funds.

 

"It's hard to raise money, but from an investing point of view, the opportunities are out there, but I think the key is being selective," said Rebecca Xu, the co-founder and managing director of Asia Alternatives at the Asia private equity forum.

 

Urbanisation has led to the migration of 700 to 900 million people to these less developed cities, which now comprise more than half of China's 1.4 billion population.

 

Tier systems are widely used to classify Chinese cities. Factors such as concentration of commercial resources, infrastructure, vitality of urban residents, competitiveness in new industries and future adaptability affect how Chinese cities are ranked.

 

Chang believes lower-tier cities in China could drive a recovery in consumption in the world's second largest economy.

 

The working class represents greater potential in comparison with the middle class in the consumer market, Chang said.

 

"For the middle class, their wealth is squeezed," said Chang. "But now we have lower-tier cities and there is a lot of gold to dig. But this is not typically where general partners (GP) and limited partners (LP) will look at."

 

Luckin, a Chinese coffee brand known for its low price, opened more than 10,000 branches over the last year in China, mostly in the lower-tier cities. By contrast, Starbucks managed to open 8,000 cafes in China in the past 20 years.

 

Another Chinese brand that has had success in the consumer market in less developed cities is Busy for you, which has been selling snacks in lower-tier cities since 2017.

 

Within seven years, the Chinese snack shop chain has expanded 3,000 stores in one province. Following a merger, Busy for you, opened a total of 15,000 stores by the end of 2024, hitting a total of 40 billion RMB ($5 billion) sales last year.

 

Participants of the panel also pointed out that the overseas market remained attractive for Chinese companies, specifically in the cosmetics and artificial intelligence sectors. Investment in China’s supply chain abroad is also high on the list for private equity investors, they said.