European LPs are struggling to commit to Chinese private equity despite the vast majority expecting their allocations to increase.
In a survey by Epiven, a European private equity advisory firm specialising in China, 88% of limited partners are looking to up their exposure to the market via domestic funds but are unable to because of a series of barriers including unclear regulation, an inability to find local GPs, and cultural differences.
The investors surveyed have a total of €156bn of assets under management. Seventy-nine percent of them are already experiencing an increased exposure to China, and 85% preferring to increase their foothold by investing directly into Chinese funds.
However, 62% of respondents found that finding the right GPs was the greatest barrier to increasing their investment. Sixty-three percent said they regularly travelled to China, but only 15% have an office there. Seventy-one percent said they relied on recommendations when looking for domestic funds to invest in. The survey reveals that investing in a European GP with portfolio companies exposed to China is an LP’s favoured way of investing
Lack of information was also a hurdle. More than half of LPs reported ‘low knowledge’ or ‘no knowledge’ on key subjects such as recent industry developments, access to GPs, historical returns, key people and events.
A whopping 90% cited unclear or uneven regulations in China as a perceived risk, 42% language and culture, and 29% worries over profit repatriation. But only 4% of respondents cited low returns on Chinese investments as a risk. As the report demonstrates, the mean IRR for private equity in China in 2007 is 67%, nearly twice the European figure of 36%.