Firms with private equity doing better than public ones

Updated: 2012-03-14 10:21

By Cai Xiao (China Daily)

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Chinese companies with capital from private-equity investors have higher profits and show faster growth than their publicly traded counterparts, experts say.

"We found that private equity-backed companies turned in 21 percent higher annual revenue growth than listed companies in their sectors and 7 percent higher profit growth in spite of increased spending on employee compensation, research and development and taxes," said Andre Loesekrug-Pietri, chairman of the Private Equity and Strategic Merger and Acquisition Working Group at the European Union Chamber of Commerce in China.

The EU Chamber of Commerce in China and the management-consulting company Bain & Co Inc published a report on Tuesday after they surveyed and analyzed data from 131 Chinese mainland companies that received at least $20 million in financing from foreign or Chinese private-equity funds from 2004 to 2008.

"(Private-equity) investors provided critical support for small and medium-sized enterprises," Loesekrug-Pietri added.

Firms with private equity doing better than public ones

According to the report, private equity-backed companies that had asset values of less than 1 billion yuan ($158 million) had triple the revenue growth rate of comparable listed companies.

Han Weiwen, a partner at Bain, said that private-equity investors will continue to regard initial public offerings as a main way to exit companies they own. But in recent times, such investors have been holding on longer in the face of a more difficult market for IPOs.

The report showed that the time between a private-equity investment and an IPO averages about two years in China, while the comparable period in Europe is 4.8 years and is 3.7 years in the United States.

"For deals made between 2004 and 2006, the average holding years before IPO was 1.9 years, and 2.1 years for those between 2007 and 2008," Han said. "And I believe the time will be longer in the future. The PE market has become more mature and investors that can build values for companies are truly required."

According to the report, China has been one of the leading destinations for private-equity capital amid the ongoing global economic troubles. More than $16 billion of such money was invested in the country in 2011, an amount equal to 0.2 percent of China's GDP. That compares with 0.3 percent of GDP in Europe and 0.5 percent of GDP in the United States.

The report also said that entrepreneurs have little access to the capital needed to operate and expand a small or medium-sized business. They often must turn to PE firms for money, and more than 80 percent of all private-equity investments are used for expansion.

"The major influences of PE investment on the business is reflected in two aspects. First, it provided the company with more working capital for expansion and also helped the company to establish business relationships. Second, the PE fund changed the structure of the executive board, making the decision-making process more open and transparent," a CFO of a surveyed healthcare company said.