Private Equity in China and India

Abstract

In the last decade, China and India have attracted an increasing number of private equity investments and dedicated funds because of their respective strong economic development. China and India have grown at average rates of 10% and 8%, respectively, over the past 10 years. This accounts—on a PPP basis—for 30% of global GDP growth in 2006. China's particularly impressive growth has been powered by manufacturing exports, while India's development has been driven by its current lead in IT, services and global leadership in basic industries (e.g., aluminum, steel). According to BusinessWeek, companies in both countries are experiencing increased profitability, although Indian companies have been doing better in recent years: between 2000 and 2004, ROIC increased from 9.8% to 12.6% for Chinese companies, but jumped from 6.9% to 16.5% for Indian companies. Lower labor costs and the increasing size of domestic markets have produced attractive opportunities for private equity funds, although valuations have been driven up to record-breaking levels because of the increasing number of investors jostling for business. Nonetheless, there are considerable risks to investment in both countries. There may be difficulties in conducting proper due diligence, challenges regarding government limitations on foreign ownership in some sectors, and issues relating to the rule of law. Moreover, once the investment has been made, it may be difficult to find properly qualified managers capable of improving operations, and exit routes may be limited due to the limited depth of capital markets. There also may be challenges arising from currency instability, and tax haven loopholes may be lost. TOPICS: Private equity , emerging , legal/regulatory/public policy , portfolio construction

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