Despite an increasing shift towards direct investment in the emerging markets of Asia, a new survey from Epiven reveals that European limited partners (LPs) are also looking to tap into China returns through European private equity firms with portfolio companies active in the country.
The survey found that 79% of European LPs are experiencing increased exposure to China, with 52% already having some allocation to China and 88% expecting their allocation to increase.
Approximately 62% said that they would be willing to allocate more to general partners with portfolio companies active in China, with the same number citing finding the right private equity house as the greatest barrier to increasing direct investment in the country.
Global or Western private equity firms managing China-focused funds were the preference of 70% of respondents. Epiven said that the preferred means of meeting GPs was through referral from a trust partner, according to 71%.
A key reason for increased interest in China is that earnings growth has been substantial in the country, driving up opportunities for superior returns. The mean that the internal rate of return for private equity in China in 2007 was 67%, according to Epiven, almost double the European figure of 36%.
There was cause for caution, though, with more than half of LPs reporting low or no knowledge on key issues such as recent industry developments, access to general partners, historical returns, key people and events.
Risk areas were unclear or uneven regulation (90%), language and culture (42%) and profit repatriation (29%). In addition, 87% would be interested in buyouts, despite these representing only 6% of deal numbers and 17% of value.
Increased attention on the emerging markets has seen a number of private equity firms setting up shop in China and India in recent years, including 3i, Blackstone Group, Kohlberg Kravis Roberts and TGP Capital. London-headquartered Candover has also built up a presence in Hong Kong, headed by partner Jamie Paton, since earlier this year and is now doing the same with Mumbai.