Since this year, global investment funds have increased their attention to the Chinese market. The abundant dry powder depressed by the epidemic and low financing interest rates will promote the vigorous development of China's private equity market in the coming year.

one

M & A dominated by M & a funds is heating up in the private placement market

In recent years, the uncertainty of IPO as a single way of investment exit has increased significantly. Although the number of domestic and foreign IPOs and financing volume of Chinese enterprises reached a record high in 2021, under the background of the game between China and the United States and stricter supervision, there are not a few listed enterprises with broken hair and upside down valuation in 2021.

At the same time, M & A integration opportunities in the domestic market are also emerging:

● first, some local enterprises face long-term challenges such as industry transformation, stagnant growth, intensified competition and management turnover, and need to deal with the strategic options of asset disposal and introducing new investors;

● secondly, under the influence of the trade war and the epidemic, many multinational companies are rethinking the layout of the global supply chain and the Chinese market, and take the initiative to adjust or spin off non core businesses;

● third, the epidemic has accelerated the adjustment of industries with overcapacity and spawned the demand for integration of many industries, especially in the fields of large consumption, enterprise services, medical treatment and so on.

Under this trend, the holding M & A dominated by private funds is becoming the preferred exit way for many enterprises and institutional investors. A number of head private equity funds have also successively established buyout teams to fully implement professional post investment management after taking corporate controlling equity or acquiring strategic minority shares through capital operation means such as leveraged buyout, management buyout and equity financing, so as to achieve sustained and efficient value creation.

two

Capital market ushers in privatization delisting boom

Looking back on 2021, affected by the new regulations on A-share delisting and the tightening of US stock supervision, the number of delisting of listed companies reached a new high. Among them, there are not only enterprises that do not comply with the regulations and are forcibly delisted, but also many Chinese concept shares seeking to be listed in Hong Kong and return to A-shares after delisting, or complete privatization with the support of private equity funds.

Enterprises actively choose privatization for the following reasons:

● first, the value of the company has been underestimated by the market for a long time, or the liquidity is poor, and investors believe that privatization can obtain greater benefits;

● second, business restructuring after privatization, and the restructured company or business can bring greater value;

● third, adjust the existing ownership structure and company structure, so that the management team can obtain greater decision-making power and autonomy;

● fourth, in the increasingly strict environment of industry and capital market supervision, privatization can not only save listing related expenses, but also help shareholders and management manage the company's business more flexibly, effectively and continuously.

In the case of privatization, private equity funds play a very important role. On the one hand, delisting enterprises have mature and standardized business models and management systems, which are convenient for future sale or secondary listing. They are the high-quality target of private equity funds for buyout; On the other hand, private equity funds can provide support for delisting enterprises in terms of capital and industrial coordination. As financial investors, private equity funds are more favored by the management of the target company.

three

ESG will be included in the scope of investment evaluation

The complexity and importance of ESG issues such as environmental protection, social issues and corporate governance are particularly prominent with the outbreak of the epidemic, and have become the focus of sustainable development in the post epidemic era. On the one hand, under the pressure of regulatory disclosure, moral value trade-offs and other internal and external constraints, enterprises are reshaping business value and realizing long-term benign development; On the other hand, ESG is also deeply influencing the behavior and judgment of investors.

In recent years, more and more investors have laid out ESG special funds and actively made special investments in subdivided fields such as social culture, biomedicine and green and low-carbon. More importantly, in addition to the traditional evaluation of industry trends, business conditions, financial information and other indicators, the evaluation of the ESG field of the target company is widely included in the decision-making scope of investors. Therefore, ESG due diligence also began to appear in the M & A transactions of China's leading private equity funds, and even the investment committee took ESG as one of the necessary prerequisites for approving investment.

The capital market is also optimistic about paying ESG premium. Investors believe that the company's ESG performance is related to the overall management quality. Good ESG management helps to reduce the relevant investment risks during the holding period in the future, and it is easier to achieve high business returns. On the contrary, if an enterprise performs poorly on ESG issues, it may directly lead to negative adjustment or discount of its transaction price.

four

Industry leading projects enjoy valuation premium

Compared with the rapid growth in previous years, the macro economy has entered a stable growth stage before and after the epidemic, and the development pattern of many industries has gradually taken shape. Therefore, when companies with high explosive growth are gradually scarce, the investment focus of the capital market shifts from incremental growth to stock growth.

In the process of increasing market concentration and flattening profits, the industry's leading enterprises have a stronger vertical competitiveness and industry integration ability, and the popularity of investment has spread rapidly in the private equity fund circle. The post investment valuation has constantly broken through the imagination, breeding a number of dazzling industry unicorns.

For investors, the financing projects of star companies are often highly competitive. Only when they have to pay higher valuation premium and make concessions on commercial terms can they win the share in high-quality projects.

For the head companies looking for financing, the market not only gives them an overvalued premium, but also gives them more opportunities to actively choose investors. The differentiated resources of different funds and the professional advantages of teams have become important considerations for shareholders and managers to choose partners.

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Article data source: Roland Berger