PE metamorphosis

New exit and entry strategies are vital for survival in China’s rapidly evolving PE industry. Richard Li assesses an industry in transformation

Private equity (PE) funds in China are facing a tough time. Their conventional exit channel, China’s IPO market, has been informally closed since late last year. And overseas IPO channels such as red-chip and H-share listings either have trading limitations or face regulatory pressures restricting access. Inconsistencies of approach between the authorities controlling the industry are causing even more trouble and confusion.

The prospects seem bleak – but are not necessarily so. The challenging changes taking place are perhaps forcing China’s PE industry to become more mature. The majority of PE funds in developed markets, for example, exit through non-IPO channels like M&A and the PE secondary market.

It’s now up to PE funds to adapt themselves to exit channels they’re not familiar with. Exits through M&A require PE funds to be skillful enough to persuade other shareholders to sell the company. And the PE secondary market may be easier for funds to sell equities, but fund managers should be aware that this market is still young, and risky, in China.