Private Equity in China Reflections on 2012 and Outlook David Brown, PwC Greater China PE Group Leader

20 December 2012

Funds: PE and VC fundraising for China investment reached record levels in 2011 with 3Q12 data, perhaps surprisingly, tracking 2011

60

50

Funds: PE/VC funds raised with geographic preference in China* (2002 – 3Q2012)

48.0

* Excludes Asia funds and global funds investing in China

38.4

US$ billion

40

39.9 34.2

35.8

30 21.3

20 14.8

14.4

10 2.4

0.9

2.8

0 2002 Source: AVCJ PwC

2003

2004

2005

2006

2007

2008

2009

2010

2011 3Q2012 2

Funds: However, if we look closer we see fewer individual fund raisings, but there were some large funds raised by many of the leading and established PEs including KKR ($3bn), PAG ($2.4bn), Hony ($2.4bn), Bain ($2.3bn) and Fountainvest ($1bn); good quality funds can still access capital, but for others it is difficult No of fund

US$ billion

Funds: PE/VC number of funds raised with geographic preference in China* (2002 – 3Q2012)

300 250

60 50

* Excludes Asia funds and global funds investing in China

200

40

150

30 234

100

172

50

20 165

162

102

94

70

0

26

27

36

2002

2003

2004

Source: AVCJ PwC

248

10 0

2005

2006

No of Fund

2007

2008

2009

2010

Total Fund raised

2011 3Q2012 3

Funds: Fundraising for the China market dominates Asian PE with around US$250 billion raised (not including allocations from nonChina specific funds) 300

250

250

Funds: Total funds raised by fund country, with geographic preference in Asia (2002 – 3Q2012)

US$ billion

200

150

100

87 57

54

50

32

0 China/HK Source: AVCJ PwC

Japan

India

Australia

Others 4

Funds: China focused funds were 17% of global PE fundraising in 2011 – the largest proportion ever, and larger if we were to factor in Asian- and global-fund allocations

Funds: PE/VC funds raised with geographic preference in China vs ROW (2005 – 2011)

800 700

679

669

US$ billion

600 535

500 400

World China

342 306 275

300

263

200 100 14

19

2005

2006

36

37

2007

2008

15

33

45

2010

2011

0 2009

Source: AVCJ and Preqin PwC

5

Funds: Globally, despite difficulties in mature markets, the PE industry has record amounts of capital under management; but there will be individual winners and losers, especially in China as the PE industry matures

Source: Financial Times, 31 July 2012 PwC

6

Funds: A truly domestic PE industry has emerged in China in the last four years, though we expect some consolidation and a tougher fund raising environment in 2012; foreign players are still important and will remain so – PwC audits 7 of the 13 leading Rmb funds that are invested by NSSF 100% 32%

80%

24%

35%

66%

60%

Funds: The growth of Yuan (Renminbi) denominated funds (2007 - 2011)

80%

40% 68%

20%

76% 65%

34% 20%

0% 2007 Source: APER PwC

2008 Yuan Funds

2009

2010

Non-Yuan Funds

2011 7

Deals: PE deal levels also hit record highs in 2011; 3Q12 data shows a marked decline yet there is some time lag factor in play; we believe that pipelines are quite strong and deal activity will strengthen from 2Q13

30

Deals: China deals, number and value (2002 – 3Q2012)

900 758

807

800 700

600

25 US$ billion

793

500

600

498

20

500

15

400

10 5

357

250 196 100

200

107

100

0

-

Investment amount (US$bn) Source: AVCJ PwC

300

No of deals

35

No. of Deals

8

Deals: China has been the single largest PE investment destination in Asia for the last six years, comprising 40%+ of Asian PE deal values in 2011 and 3Q12 120

Deals: Deal values by Asian country (2002 – 3Q2012)

US$ billions

100 80 60 40 20 0 2002

2003

Australia Source: AVCJ PwC

2004

2005

Mainland China

2006 India

2007

2008

Japan

2009

2010

South Korea

2011 3Q2012 Others 9

Deals: Yet, globally, China has a much smaller share, mainly because there are still much fewer mega-deals, and the market is dominated by growth capital minority stake investments 800 685

700

Deals: Deal values China vs ROW (2005 – 2011)

659

600 500

World China

400 300

295 258 218 186

200

74

100 10

11

16

16

15

25

28

2005

2006

2007

2008

2009

2010

2011

0 Source: AVCJ and Preqin PwC

10

Deals: Growth capital deals predominate, but PIPE (private investment in public equity) deals are important and we are seeing a buy-out market starting to emerge 35

Deals: Deal values by type (2007 – 3Q2012)

30

US$ billions

25 20 15 10 5 0 2007 Mezzanine/ Pre-IPO Bridge Loan Source: AVCJ PwC

2008

2009

Growth PIPE Financing

2010 Start-up Others

2011

3Q2012 Buy-outs

11

Deals: If we look at the same statistics in terms of deal numbers (rather than values) the dominance of growth capital is very evident; PE has emerged as an important provider of capital to China’s capital-starved private sector

Deals: Deal numbers by type (2007 – 3Q2012)

900 800

Number of deals

700 600

500 400 300 200 100 0 2007 Mezzanine/ Pre-IPO Bridge Loan

Source: AVCJ PwC

2008

2009

Growth PIPE Financing

2010 Start-up Others

2011

3Q2012

Buy-outs

12

Deals: Consumer-linked, clean energy, agriculture, media and entertainment, technology, healthcare (industries perceived to benefit from China’s 5-year plan) are often cited as target industries although, overall, PEs tend to be somewhat industry agnostic

Deals: Deal numbers by industry (2007 – 3Q2012)

900 800

Number of deals

700 600 500 400 300 200 100 0 2007

Source: AVCJ PwC

2008

Information technology Computer related

2009 Medical Electronics

2010

2011

3Q2012

Manufacturing - Heavy Others 13

Exits: The PE industry in China is notable in that most exits have been by IPO; predictably, there has been a decline in 3Q12 and there is a growing pipeline of future exits, perhaps more than the market can handle – this will be a challenge for the PE industry over the next few years

350 300

Exits: China exits – numbers of exits (2007 – 3Q2012)

No of deals

250 200 150 100 50 0 2007 Source: AVCJ PwC

2008

2009 M&A

2010 PE

2011 IPO

3Q2012 14

Exits: PE/VC backed Chinese enterprises have raised more than US$20 billion annually by IPO in four of the last six years in Hong Kong, New York and China, but 3Q12 levels have been much lower 70

Exits: China PE backed IPO exits – amounts raised by bourse (2007 – 3Q2012)

60

US$ billions

50 40 30 20 10 0 2007 Hong Kong Source: AVCJ PwC

2008 Shanghai A

2009 Shenzhen

2010

2011

NYSE/ NASDAQ

3Q2012 Others 15

Exits: By far the largest number of IPOs are mainland China listings; in 2011, Hong Kong saw 27 PE-backed IPOs and New York 11; these figures will increase when markets stabilise though accounting scandals have complicated things, especially in the US; China’s A-share market is important 250

Number of IPOs

200

Exits: China PE backed IPO exits – number of exits by bourse (2007 – 3Q2012)

150

100

50

0 2007 Hong Kong PwC

2008 Shanghai A

2009 Shenzhen

2010

2011 NYSE/ NASDAQ

3Q2012 Others 16

Exits: China has exceeded the US in terms of numbers of PE or VC backed IPOs for each of the last five years; this reflects the relative profiles of the two markets (growth vs buy-out) to some extent 250 200

Exits: PE backed IPO exits China vs US – number of exits (2007 – 2011)

150 US China

100 50 0 2007

2008

2009

2010

2011

Source: AVCJ ; Thompson Reuters ; NVCA PwC

17

Deals vs Exits: Overall, there is a huge overhang of Chinese PE-backed enterprises waiting to come to market either by IPO or by M&A exit – this presents a real challenge to the industry over the next few years as IPO markets will not be able to accommodate all of the backlog

Exits: Number of investments vs number of exits (2006 – 3Q2012)

1000

800

600

400

811

793

758 600 504

200

0

78 61 59

2006

131

2007

89 51 46

2008 Investments

PwC

90

498

212

95

170

88

2009 IPO exit

2010

2011

359 55 92

3Q2012

M&A / PE exit 18

Key messages • PE has emerged as a key provider of capital to the liquidity starved private sector of the economy in China with real policy support and new regulator(s) – this is driving strong market growth and activity • But there will be winners and losers in the sector - high quality, professional GPs will thrive, but the bubble is already bursting for many of the plethora of renminbi funds raised over the last few years • Despite this, Yuan denominated PE fund raising is here to stay and the TPGs and KKRs of China will emerge to compete with their global peers; we are already seeing a step-up in outbound M&A involving some of the pre-eminent Chinese GPs • Within China, the days where PEs could throw money at deals and expect a “rising tide to float all boats” have gone; careful and professional diligence is vitally important; fraud risk is high; PEs should be prepared to walk away from opportunities if sellers will not accommodate diligence • The industry as a whole is moving into “exit phase”; the backlog of exits represents a real challenge for the sector; it is more than IPO markets can absorb, and trade and secondary sales will become more frequent • We think new deal and exit activity will accelerate strongly from 2Q13 as pricing expectations adjust, 2012 results become available, IPO markets re-open, and China’s leadership transition takes effect; 2013 will be a record year for PE in China and there are very strong tailwinds for the PE industry in China over the medium term PwC

Slide 19