According to a recent piece in BusinessWeek, private equity firms spent a total of $737.4 billion in 2006 -- more than the entire GDP of Australia! With buyout firms profiting 20% to 30% per year on average from their lucrative deals, rapid growth in the private equity market is no surprise. Now these firms are turning to global markets for additional opportunities, and their attention is increasingly fixed on China.
In the past, Chinese government regulation has prevented foreign private equity firms from buying up companies there. However, Chinese leaders recently found that the majority of the country's corporate financing still comes from bank loans, and they now apparently realize the need for a domestic private equity industry. Accordingly, the government has created new regulations to allow private equity players access to Chinese companies.
Of course, there are strings attached. The government wants to promote the local currency, so investors will have to complete their transactions in the renminbi. Additionally, when they sell their stakes back to the public, they will have to list the company on mainland markets, rather than offshore exchanges.
Furthermore, the government has made it clear that while it welcomes private equity funds, investors must have a long-term investment approach. Chinese officials are apparently leery that some buyout funds are only in it for short-term profits. Carlyle Group has already had to scale back its planned investment in Xugong Group Construction Machinery after the government rejected its offer.
Private equity could have a unique flavor in China. In the U.S., a typical private equity deal involves using large amount of debt to buy a mature company, and then revamping its operations. In turning the firm around, the private investors hope to ultimately IPO or sell it at a higher valuation. But the Chinese economy is on fire these days, and with its high growth rates, companies really need capital for expansion. Plus, Chinese companies aren't too thrilled with the idea of foreign buyout companies owning their assets. As a result, the typical deals are fairly small. In a way, private equity investments in China may really be more like venture capital plays.
Wall Street's premier financiers are already revving up operations in China. Prior to the Blackstone Group's
Economic growth in China has yet to peak, and recent GDP figures have confirmed the economy is still heating up. It should be interesting to keep tabs on major private equity players as the Chinese government begins to welcome them.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,951 out of more than 60,000 total participants in CAPS. The Fool has a disclosure policy.