Here’s Where PE Money Is Flowing Now That China Is Falling Out of Favor

Dealmakers in Asia are gradually shifting their focus from China to India as the latter demonstrates a more robust exit climate and tech-friendly policies.

Bertha Wang/Bloomberg

Bertha Wang/Bloomberg

India is pulling ahead of China when it comes to attracting capital from global private equity firms that invest in Asia.

Global investors first started pulling back from public markets in China as they tried to navigate markets amid Russia’s invasion of Ukraine. But now private companies in China are feeling the change in sentiment as well.

Although China is still the top destination for private equity dealmakers in Asia, its southern neighbor – India – is expected to grow far faster. Investors can blame China’s sluggish initial public offering market and Beijing’s crackdowns on technology. Between 2020 and 2021, the value of deals went up 47 percent in India but only 23 percent in China, according to Bain Consulting’s latest Asia-Pacific private equity report. As a result, the Indian market now represents 20 percent of global private investments in Asia.

“As investors grow more cautious toward China and seek deals elsewhere in the region, India’s private equity market may benefit,” according to the report.

An annual Bain Consulting survey of general partners in the Asia-Pacific region showed investors’ declining confidence in China. More than 60 percent of GPs investing in the broad Asia-Pacific region are optimistic in 2022, according to Bain. That stands in sharp relief to sentiment on China. Only 35 percent of GPs investing in China are confident about the macroeconomic environment that will unfold in 2022, “a sharply divergent view that may signal a fundamental change in China’s performance,” the report said.

The unfriendly exit environment is one of the reasons why private investors are taking a more bearish approach to China. When firms want to get out of a company in the Asia-Pacific region, the most popular option is an initial public offering, which represents 47 percent of deal value, according to Bain Consulting. Yet in China, the value of IPOs in 2021 dropped 50 percent from a year earlier as the Chinese government cracked down on major industries like technology, consumer goods, and online education.

In contrast, the value of IPOs on India’s domestic stock exchanges reached a new high in 2021. Thanks to “loosening listing requirements and strong liquidity,” the exit value in India reached $38 billion in deal value in 2021, up 131 percent from the year before, according to the report. In China, however, exit value only went up 21 percent last year, mostly because the U.S. started tightening IPO requirements for Chinese companies in the second half of 2021.

“Policy uncertainty and poorly performing public markets left China unable to support the high IPO multiples required for a profitable exit,” the report said. “Those conditions could continue to dampen China’s exit market in 2022.”

India also attracts global investors because it is similar to China “in population, growth rates, and state of development,” the report said. In particular, the growth of India’s technology industry mirrors that of China’s before the Chinese government started tightening its grip on tech giants in 2020. In 2021, the Internet and tech sector accounted for 62 percent of the overall deal value in India. Because of the Indian government’s “initiatives to encourage businesses to go digital,” investors will be drawn to the country for the increasing digital penetration, according to Bain.

But investors are clearly not writing off China despite a volatile 2021. For one, the absolute size of the Chinese market relative to India is hard to ignore. China accounted for 43 percent of all private investments in the Asia-Pacific region in 2021, dwarfing India by more than 20 percentage points, according to the Bain report. Second, although sectors like online education and consumer products were subject to strict government regulations, thriving industries like semiconductors, software, and artificial intelligence continued to fuel deal making in the second half of the year.