Post on 27-Feb-2019
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DRAFT
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 2HKG 20160426_GC PE report Prez_EN_Final
2015 was another blockbuster year for Greater China, with deal value and volume at record level- Market has evolved through four stages in the past 16 years- Surge of multibillion deals; Internet sector and buy-out (especially take-
private deals) as main growth drivers While market environment became more challenging,
investment multiples were up modestly- Decline in Greater China-focused fund-raising- Exits declined significantly in second half of 2015 given volatility in public
market- Increased participation from institutional investors
China is entering era of “new normal,” calling for differentiated strategy for investors- Unlikely for 2016 to reach similar level of activities as 2015- Wealth-&-health-driven consumption, selected subsectors in Internet,
“Made in China 2025,” and outbound M&A remain attractive- GPs need to enhance capabilities to create value through transformation
and performance improvement
Summary
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INVESTMENTS FUND-RAISINGEXITS
2015 was another strong year for global buyouts
Sources: Dealogic; Preqin
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Amid global turbulence, Asia-Pacific PE remained strong in 2015, especially deal making
Deal valueDeal count
Exit valueExit count
DEAL VALUE SOARED TO A NEW RECORD
EXIT VALUE REMAINED ROBUST
FUND-RAISING TRACKED THE HISTORICAL AVERAGE
Note: Real estate and infrastructure funds are excluded in the three graphsSources: AVCJ; Preqin
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PE market in China has evolved through four stages in the past 16 years
*excludes real estate and infrastructureSource: AVCJ
Golden days for “growth capital” Financial crisis and RMB 4 trillion stimulus
Austerity campaigns
Surge of Internet
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The PE market in Greater China had another blockbuster year in 2015, with 56% increase in deal value
56%154%
*excludes real estate and infrastructureSource: AVCJ
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0
50
100
$150M
5-year average(2010-14)
10
72
11
82
12
94
13
59
14
115
15
142
Greater China averageinvestment deal size*
5-year average(2010-14)
68%
2015 vs.2010-14(average)
A surge of multibillion deals pushed average deal size significantly higher than historical average
INVESTMENT DEAL COUNT BY SIZE
0
20
40
60
80
100%
10
328
11
381
12
236
13
255
14
387
15
488
4 4 2 2 7 14Numberof deals>$1B
Greater China investment deal count by size*
268%92%
136%136%
101%
22%
28%
2015 vs.2010-14(average)
*excludes real estate and infrastructureSource: AVCJ
>$1B $500M-$1B $200-$499M $100-$199M$50-$99M $25-$49M $10-$24M
AVERAGE INVESTMENT DEAL SIZE
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Buyout deals, especially take-private deals, are driving growth
DEAL VALUE BY TYPE
0
20
40
60
80
100%
10
24
11
31
12
22
13
15
14
44
15
69
Greater China investmentdeal value by type* ($B)
573%
60%
35%
651%
2015 vs.2010-14(average)
419%
-15%
20%
250%
CAGR(2014-
15)
*excludes real estate and infrastructure **growth deals include mezzanine, pre-IPO, growth and expansion deals; ***other includes bridge loans, start-up and turnaround dealsSource: AVCJ
Buyouts Growth** PIPE Other***
PUBLIC TO PRIVATE (P2P)
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The Internet sector accounts for about 40% of deal value and about half of all deals in 2015
Notes: Excludes infrastructure and real estate deals; Internet deals include e-commerce, O2O, Fintech, online education, online media and entertainment, and online healthcareSource: AVCJ
0
20
40
60
80
100%
2011
381
2012
236
2013
255
2014
387
2015
Inter-net
Othersectors
488
-6%
37%
CAGR
69 40 74 142 242Internetdeal count
Number of Greater China deals (deals >$10M)
(2011-15)
0
20
40
60
80
100%
2011
$31B
2012
$22B
2013
$15B
2014
$44B
2015
Inter-net
Othersectors
$69B
12%
54%
Greater China deal value (deals >$10M)
(2011-15)CAGR
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Within the Internet sector, e-commerce and O2O services were the most active subsectors
INTERNET DEAL COUNT INTERNET DEAL VALUE
0
100
200
300
2011
69
2012
40
2013
74
2014
142
2015
242
61%
125%
135%
116%4%
145%82%
(2013-15)CAGR
Greater China PE/VCInternet deal count bysector (deals >$10M only)
0
5
10
15
20
25
30
35
Internetdeal value by sector($B, deals >$10M only)
2011
5
2012
4
2013
2
2014
7
2015
28
144%
406%
288%353%85%1%
449%
(2013-15)CAGR
Note: Exits and investments with announced deal value >$10M onlySource: AVCJ
E-commerce O2O services Fintech Education HealthcareMedia/entertainment Other
Driven by ~$7B investment in
Qihoo 360
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Greater China-focused fund-raising declined by 32% in 2015, especially for RMB funds
Number of funds
Average size ($US M)
*excludes real estate and infrastructureSource: Preqin
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IPOs were still the preferred exit type, but public equity sell-offs in 2H15 caused the exit activities to decline
0
10
20
30
$40B
Q1
4
Q2
12
Q3
9
Q4
3
Q1
4
Q2
6
Q3
4
Q4
5
Q1
7
Q2
7
Q3
34
Q4
11
Q1
7
Q2
21
Q3
8
Q4
11
Greater China PE exit value by quarter*
2012
VALUE BY QUARTER VOLUME BY QUARTER
2013 2014 2015
0
20
40
60
80
Q1
50
Q2
48
Q3
57
Q4
25
Q1
34
Q2
32
Q3
23
Q4
39
Q1
61
Q2
44
Q3
55
Q4
59
Q1
58
Q2
72
Q3
26
Q4
39
Greater China PE exit volume by quarter*
2012 2013 2014 2015
*excludes real estate and infrastructure Source: AVCJ
IPO Trade Secondary
Includes $25B
Alibaba IPO
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Valuations continued to increase in 2015 …
GREATER CHINA
Notes: Equity contribution includes contributed equity and rollover equity; based on pro forma trailing EBITDA; for the Asia-Pacific region, based on PE-backed M&A transactions where there is a transaction value; these M&A transactions exclude extreme multiples (<1 or >100)
Source: S&P Capital IQ
ASIA-PACIFIC REGION
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… but valuations are perceived as being more attractive recently due to the sell-off in the public market
“WHAT IS YOUR PERSPECTIVE ON VALUATIONS OF POTENTIAL TARGETS IN THE ASIA-PACIFIC REGION?”
Jan-
15
Jan-
16
Jan-
15
Jan-
16
Jan-
15
Jan-
16
Jan-
15
Jan-
16
Jan-
15
Jan-
16
Jan-
15
Jan-
16
Sources: Asia-Pacific PE survey 2016 (n=125); Asia-Pacific PE survey 2015 (n=145)
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Emergence of institutional investors has increased the number of active players
ACTIVE PLAYERS IN THE MARKET PLAYER TRENDS
*excludes real estate and infrastructure **an active player is someone who made an investment in the respective yearSource: AVCJ
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Institutional investors are gaining importance, participating in more than half of the top 20 deals in 2015
Deal targetValue $US
millionsInstitutional investors
Qihoo 360 7,140
• Ping An
• Sunshine Insurance
• Taikang Life Insurance
China Internet Plus Holding 3,300
• Tencent
• China Development Bank
• CICC
WuXiPharmaTech 3,119
• Ping An
• Shanghai Pudong Development Bank
Momo 3,029 • Huatai Zijin (under Huatai Securities)
China Network Systems (Taiwan)
2,300 • Far EasTone Telecommunications
CITIC Securities 2,189
• Yunfeng Capital (under Alibaba)
• Harvest Fund Management
Didi Kuaidi 2,000
• Tencent
• Alibaba
• Ping An Ventures
CMC Holdings 1,582• Alibaba
• Tencent*excludes real estate and infrastructureNote: Deals with transaction value >=$400M includedSource: AVCJ
INSTITUTIONAL INVESTORS PARTICIPATED IN 14 OUT OF TOP 20 DEALS
SELECT INSTITUTIONAL INVESTORS IN THE TOP 8 DEALS
0
5
10
15
20
Number of deals
Participated in byinstitutional investors
Other
20
Greater China (number of dealsparticipated in by institutional investors)
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Market expects GDP growth to further slow down afterward
Sources: National Bureau of Statistics of China; World Bank; OECD; IMF; The Economist; analyst reports
Market view
China GDP growth projection
(2015-16F) (2016 onward)
Market view 6.3-7.0% 5.3-6.9%
“Along with many other analysts, we believe the potential (or ‘trend’) growth of the Chinese economy is slowing … contributions from labor, capital and total factor productivity are likely to see slower growth in coming years.”
Goldman Sachs, China Report, August 2015
“The slowdown … reflects progress in addressing vulnerabilities, including slower total social financing growth, tighter oversight of shadow banking, correction in real estate and a new budget law … GDP growth should be permitted to slow to 6% to 6½% next year.”
IMF Country Report on China, August 2015
“Consumption to GDP will continue to increase, but there will be a gradual, more moderate growth trajectory.”
China Economic Update 2015,World Bank
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Despite challenging macro outlook, Greater China is still viewed as the most attractive market
“WITHIN THE ASIA-PACIFIC REGION, WHAT COUNTRIES WILL BE THE MOST ATTRACTIVE MARKETS FOR NEW DEALS IN THE NEXT 12 MONTHS?”
Sources: Asia-Pacific PE survey 2016 (n=125); Asia-Pacific PE survey 2015 (n=145)
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0
20
40
60
80
100%
Greater China funds on change in deal activity
Significantincrease(>25%)
Slightincrease(10-25%)
No significantchange
Decline
GPs have softened their optimism, with concerns over economic downturn, competition, sourcing and valuations
Factors Greater China
Macroeconomic conditions 62% 73%
Regulation 15% 13%
Other sources of capital 8% 20%
Financing cost & interest rate 0% 20%
Difficulty fund-raising 8% 0%
Investment professionals 8% 7%
Deal opportunities 38% 20%
Valuation expectations 38% 40%
Competitive intensity 54% 53%
Promoter acceptance of PE funds 15% 7%
Exit environment 23% 13%
Asset bubbles 15% -
January2015
January2016
“DO YOU EXPECT A SIGNIFICANT PICKUP IN DEAL ACTIVITY IN YOUR MARKETS IN YEAR AHEAD COMPARED WITH PREVIOUS YEAR?”
“WHICH OF THE FOLLOWING DO YOU THINK WILL BE A CHALLENGE IN YOUR MARKET?”
Percentage of mentions of various key challenge factorsBold: Top factors that will drive changeBlack: Factors that will drive change (2016 survey)Blue: Factors that will drive change (2015 survey)
Sources: Asia-Pacific PE survey 2016 (n=125); Asia-Pacific PE survey 2015 (n=145)
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GPs are expecting fund-raising to be more challenging, as well as several key challenges for exit activities
“HOW DO YOU EXPECT THE FUND-RAISING ENVIRONMENT TO CHANGE IN YOUR
RESPECTIVE MARKETS IN 2016?”“WHICH OF THE FOLLOWING DO YOU THINK WILL BE A CHALLENGE IN YOUR MARKET?”
0
20
40
60
80
100%
Greater China PE funds on expected change infund-raising environment
Getsignificantlybetter
Get somewhatbetter
Remain as is
Get somewhatmorechallenging
Getsignificantlymorechallenging
January2015
January2016
Factors Greater China
Change in macroeconomic environment 73% 29%
Evolution in valuations 55% 29%
Modification of capital market/IPO environment 82% 21%
Change in secondary sales environment 18% 0%
Evolution in corporate cash reserves 18% 14%
Pressure to exit and return invested capital to LPs 27% 14%
Sources: Asia-Pacific PE survey 2016 (n=125); Asia-Pacific PE survey 2015 (n=145)
Percentage of mentions of various key challenge factorsBold: Top factors that will drive changeBlack: Factors that will drive change (2016 survey)Blue: Factors that will drive change (2015 survey)
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Information technology (IC chips, telecom equipment, industrial OS & software)
Several industries are expected to deliver strong growth under “new normal” EXAMPLE INDUSTRIES
Online/offline convergence
Wealth-&-health-driven consumption “Made in China 2025”
Green technology
Online retail/ platform/O2O
Internet financialservices
Internet-related logistics/ transportation, etc.
Healthcare(online & offline)
Wealth & asset management
Agribusiness (Healthy/premium food)
Robotics & CNC equipment
Electric vehicles (EV) & components
Pharmaceutical & medical devices
Tourism
Sources: Bain & Company
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Surge in outbound PE deals is likely to continue
0.0
2.5
5.0
7.5
10.0
12.5
China PE outbound investmentsdeal size ($US billions)
2013
2
2014
7
2015
11
143%
(2013-15)CAGR
61 73 69Deal count
~30-50 ~80-100 ~150-170Averagedeal size($US M)
*Total deal size only includes deals with value announced**Technology includes computer hardware/software, electronics (e.g., semiconductors), etc.; other includes agriculture, ecology and services, etc.Sources: AVCJ; Bain analysis
0
20
40
60
80
100%
China PE outbound investmentsbreakdown by sector ($US billion)
2013
Technology
Internet
CPR
Healthcare
FSIndustrialOther
2
2014
Technology
Internet
Consumerproductsand retail
Travel andhospitality
Healthcare
FS
Industrial
Other7
2015
Technology
Internet
Healthcare
FS
IndustrialOther
11
CHINA PE OUTBOUND DEAL SIZE INCREASED*
WITH INVESTMENTS FOCUSED ON TECH AND INTERNET SECTORS**
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High
LowLow High
Cos
t/ca
sh u
psi
de
• Value creation mainly from financial engineering- For example, de-leverage, debt
restructuring, gap between entry and exit valuation
- Future evolvement also dependent on exit environment and capital markets
• Topline and earning growth relied heavily on industry tailwinds and new geographies, products and capacity expansion, as well as buildup of new capabilities and assets
• Earning growth from operational improvement, execution excellence and organizational enablers
• The combination of strategic, operating, organizational and financial tactics will improve topline and earning growth
Differential growth upside
Growth capitalArbitrage plays
More transformation and performance improvement deals are expected…
TransformationPerformance improvement
Future trend of deal value %Sources: AVCJ; Bain analysis
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…calling for different focus and capabilities
Sector focus
Portfolio
Diligence
Organization
BEFORE “NEW NORMAL” UNDER “NEW NORMAL”
• Opportunistic in sector selection, as attractive growth is a “given” in the underlying market
• Despite increasing awareness of value creation, GP’s impact on portfolio companies’ strategy,operations and organization still limited
• Deal thesis mainly focused on growth, or land grabbing;operational improvement a lower priority
• Many GPs have started to build portfolio team but their capabilities vary
• Many sectors will see much slower growth; therefore, critical to pick the winning sectors
• More sector expertise and relationships required
• Many portfolio companies require “re-diligence” to confirm or revise the original thesis
• When needed, more hands-on to steerstrategic and operational path
• Growth no longer the primary thesis• Thesis (hence diligence focus) should
pivot toward operational improvement or turnaround opportunities
• Stable, sector-focused investment team with in-depth expertise
• Invest disproportionately in portfolio management team and operational improvement capabilities
Sources: Bain & Company
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Market definition
•Includes:-Investments and exits with announced value of more than $10 million-Investments and exits in Asia-Pacific region (Greater China=China, Taiwan, Hong Kong; India; Japan; South Korea; Australia and New Zealand; Southeast Asia=Singapore, Indonesia, Malaysia, Thailand, Vietnam, Philippines, Laos, Cambodia, Brunei, Myanmar; other Asia-Pacific)
-Investments with closed, agreement-in-principle or definitive agreement status
•Excludes:-Bridge loans, franchise funding, seed/R&D deals-All non-PE/VC deals (M&A, consolidation)-Real estate and infrastructure (airport, railroad, highway and street construction, heavy construction, ports and containers, and other transport infrastructure)