As I wrote the last time out, the game is changed in PE investing in China. The firms most certain to prosper in the future are those with ability to raise and invest renminbi, and then guide their portfolio companies to an IPO in China. For many PE firms, weâ€™re at a hinge moment: adapt or die.Â
Luckily for me, I work on the other side of the investment ledger, advising private Chinese companies and assisting them with pre-IPO capital raising. So, while the changes now underway are a supreme challenge for PE firms, they are largely positive for the excellent SME businesses I work with.
They now have access to a greater pool of capital and the realistic prospect of a successful domestic IPO in the near future. Both factors will allow the best Chinese entrepreneurs to build their businesses larger and faster, and create significant wealth for themselves.Â
As my colleagues and me are reminded every day, weÂ are very fortunate. We have a particularly good vantage point to see whatâ€™s happening with Chinaâ€™s entrepreneurs all over the country. On any given week, our company will talk to the bosses of five and ten private Chinese SME. Few of these will become our clients, often because they are still a little small for us, or still focused more on exports than on Chinaâ€™s burgeoning domestic market. We generally look for companies with at least Rmb 25 million in annual profits, and a focus on Chinaâ€™s burgeoning domestic market.Â
For the Chinese companies we talk to on a regular basis, the outlook is almost uniformly ideal. Chinaâ€™s economy is generating enormous, once-in-a-business-lifetime opportunities for good entrepreneurs.
Here’s the big change: for the first time ever, the flow of capital in China is beginning to more accurately mirror where these opportunities are.Â
Chinaâ€™s state-owned banks have become more willing to lend to private companies, something they’ve done only reluctantly in the past. The bigger change is there is far more equity capital available. Every week brings word that new PE firms have been formed with hundreds of millions of renminbi to invest.
The capital market has also undergone its own evolutionary change. Chinaâ€™s new Growth Enterprise Market, known as Chinext, launched in October 2009. In two months, it has already raised over $1 billion in new capital for private Chinese companies.Â
In short, the balance has shifted more in favor of the users rather than the deployers of capital. That because capital is no longer in such short supply. This is among the most significant financial changes taking place in China today: growth capital is no longer the scarcest resource. As recently as a year ago, PE firms were relatively few, and exit opportunities more limited. Within a year, my guess is the number of PE firms and the capital they have to invest in private Chinese companies will both double.Â
Of course, raising equity capital remains a difficult exercise in China, just as it is in the US or Europe. Far fewer than 1% of private companies in China will attract outside investment from a PE or VC fund. But, when the business model and entrepreneur are both outstanding,Â there is a far better chance now to succeed.
Great business models and great entrepreneurs are both increasingly prevalent in China. Iâ€™m literally awestruck by the talent of the Chinese entrepreneurs we meet and work with â€“ and Iâ€™ve met quite a few good ones in my past life as a venture capital boss and technology CEO in California, and earlier as a business journalist for Forbes.Â
So, while life is getting tougher for the partners of PE firms (especially those with only dollars to invest), it is a better time now than ever before in Chinese history to be a private entrepreneur. That is great news for China, and a big reason why Iâ€™m so thrilled to go to work each day.Â Â