Ahead of our AVCJ PE &VC Beijing Forum to be held on 5 September, we analyze private equity pipeline activity based on Mergermarket’s Likely to Exit (LTE) predictive algorithm. Mergermarket's LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.

Private equity M&A activity in China plummeted in terms of deal volume and deal count since 2022 and has showed little sign of recovery in the first half of this year, amid economic slowdown, increasing regulatory oversight, and prolonged US-China political tensions, suggesting lackluster investor confidence in the country, according to dealmakers polled by this news service.    

The total deal count and volume of financial sponsor M&A activity, including both entry and exit deals, declined 75% and 92% YoY respectively in 2022, due to COVID-19 restrictions. China’s economy has experienced a weaker-than-expected rebound post Covid as falling exports, weak retail sales and a moribund property sector weigh on growth. 

The tepid sentiment is correlated with the sluggish capital market, with the Shanghai Composite Index slipping 16% and the Hang Seng Index slipping 40% from the highest point of 2021.

Valuation inversion between the primary and public market has been rattling PE investment confidence and posing exit challenges, according to two industry sources.  

“It is the worst time to do a leveraged buyout,” said a third industry source.

Instead of making new investments, GPs are exerting more effort into seeking monetization via trade sale, M&As, and requiring portfolio company share buy-backs to increase Distributed to Paid-In Capital (DPI), said the first two industry sources.

However, exits via trade sale are not progressing smoothly as valuation gaps between seller and buyer remain substantial, with buyers exhibiting caution about investments, said the third industry source.

On the other hand, financial sponsors have been facing challenges as they seek exits from both domestic and overseas listings, said the first industry source.

Since earlier this year, the Chinese securities regulator has imposed onerous requirements and more stringent examination processes for the IPO applications to the STAR Market, which is designed to accommodate high-tech industrials primarily.

Since March, Chinese regulators have tightened regulatory reviews of US IPO applications by Chinese companies related to national and data security, acting as the ultimate gatekeeper. Such a move is partially in response to the US imposition of strict auditing rules on Chinese IPO candidates to allow US regulators to access their audit records as a condition of listing, said the first industry source.

Industrial and healthcare sectors, long favored by PE investors, are both confronting weak investor confidence as a result of the economic slowdown and heightened regulatory scrutiny in the country.

PE exit activities in industrials have nosedived with USD 516.6m transaction volume across four disclosed deals this year as of 28 August, down from USD 3.7bn across 32 disclosed deals throughout 2022, and USD 10.5bn across 33 disclosed deals in 2021, according to AVCJ data. Industrials are categorized into ecology, electronics, manufacturing, mining and metals, textiles and clothing in the AVCJ database.

Moreover, medical investment in China has also seen a dramatic drop from the peak in 2021 with deal volume decreased by some 49% in 2022 and no pickup this year, as per AVCJ data.

The Biden administration has imposed a string of tech bans on China’s critical technology segments, including the latest executive order (EO) on US investment into China tech, issued earlier this month, which has stirred up negative market sentiment among USD-denominated funds. They are now reviewing their tech-related portfolio assets in China for potential exit routes, as reported by this news service.

Specifically, industrial assets that are well-positioned for sale this year would be advanced manufacturing, clean-energy and decarbonization technologies, semiconductors, supply chains, and other industrials in line with Beijing’s long-term efforts to boost real economy, said the first industry source.

The medical sector is feeling the heat from domestic regulators as the Chinese government presses ahead with efforts to reduce drug and device prices, affecting the growth of industry players and adding exit challenges for PE sponsors, said the second industry source. A recent anti-corruption crackdown in the healthcare sector has done little to assuage industry concerns, he added.

Mergermarket’s Likely to Exit (LTE) predictive algorithm has seen several PE-sponsored healthcare and industrial targets in high scores, which implies PE investors have high intention to seek exit.

Sponsor exit watchlist  

ShyaHsin Packaging, a Jiangsu, China-based cosmetics packaging manufacturer which was acquired by Blackstone in 2017, has an LTE score of 65 out of a maximum 100. The US-based financial sponsor was reported by Mergermarket earlier this month to be looking to launch the sale in September.

Pearl Engineered Solutions, a Hong Kong- and Singapore-headquartered engineered plastic injection components maker, has an LTE score of 63/100. The US-based Platinum Equity, which bought the portfolio asset in 2015, was reported to kick off its exit process in 2Q23, as per Mergermarket reporting in June.

Arm Technology (China), a Shanghai-based semiconductor company which was invested by Hopu Investment Management, has an LTE score of 60/100. As its parent company, UK-based microchip designer Arm Holdings, was reportedly last April poised to regain control of Arm China following the removal of Arm China Chief Executive Officer Allen Wu from his position at the Chinese joint venture.

Neusoft Medical Systems, a Chinese high-end medical equipment maker, with an LTE score of 58/100, has been held by its PE investors Canada Pension Plan Investment Board (CPPIB), along with Hony Capital, Goldman Sachs, Frontline bioVentures and Dalian Neusoft Holdings, for over eight years since December 2014. It was reported in September 2022 to have filed a Hong Kong listing for the third time, according to local media reports.  

Hong Kong Asia Medical, a healthcare service provider acquired by US PE firm General Atlantic in September 2018, has an LTE score of 56/100 for an up to five-year period. It embarked on a USD 400m Series D financing in February 2022, according to local media reports.

Asia Pacific Medical Group, a medical services provider with five hospitals and several clinics in China and Southeast Asia, acquired by US PE firm Bain Capital in March 2016, has an LTE score of 56/100 for a more than seven-year hold. The company raised a Series A round in November 2022.

Suzhou Xinrong Best Medical Instrument, an orthopedic implant manufacturer acquired by Blackstone Group in September 2014, has an LTE score of 55/100 for a more than eight-year holding period. The portfolio asset was reported to be put up for sale in 2017 and 2021.