Corporate Governance makes future difference for private equity industry in China study says

A joint study from Deutsche Börse and CMS Hasch Sigle shows that the quality of investments becomes more important. As a result of the slowing Chinese Economy, of closed IPO exit channels and of the increasing competition in many sectors of the economy the level of Corporate Governance of the companies can make the difference between good and mediocre returns.

"The times where companies could be sold with high multiples due to the China growth phantasy are definitely over", says Alexander von Preysing, Deputy Head of Issuer & Primary Market Relations at Deutsche Börse. Fund Managers which want to differentiate themselves see the adherence to stringent Corporate Governance as a key topic to add value during their investment cycle. Many fund managers would welcome a more rigorous approach to implement international Corporate Governance standards. "It is still a long way to go but Chinese entrepreneurs will sooner or later understand that the rules of the capital markets have unavoidably to be complied with", emphasizes Volker Potthoff from CMS Hasche Sigle.

The private equity and venture capital industry in China is facing a more challenging environment. Fund raising of the PE/VC market has declined to 7.8 billion US-Dollar (first six month of 2013 = H1 13) from 18.5 billion US-Dollar in H1 12 and 16.2 billion US-Dollar H2 12. The fundraising of US-Dollar funds was particularly negatively affected. Over the same time period the number of investment deals shrank from 941 to 516 and the number of PE/VC-backed IPOs from 174 to just 13! However with investable capital of 116 billion US-Dollar (PE funds, H1 13) and 50.3 billion US-Dollar (VC funds, H1, 13) the industry plays an important role in financing the private sector economy in China as well as for the Chinese financial markets and their future development.

Background

The study is based on fact gathering and interviews conducted with European and Chinese private equity fund managers invested in Chinese Private sector businesses as well as with institutional investors based in China and Europe. Volker Potthoff from CMS Hasche Sigle comments: "It concludes that the significance of a well-balanced Corporate Governance is increasing when Investment decisions are taken". The paper highlights the significance of a well-balanced corporate governance scheme for the future success of the companies invested in as well as for the private equity managers with respect to their investment returns, their ability to raise new money and to differentiate themselves from competitors.