Complexities and opportunities: What role will China play in the future of private market?
China's private markets have been facing its share of complexities in recent years, from regulatory changes to geopolitical turmoil and a general slowdown in the economic landscape. However, the region still maintains space for opportunities, with the long term prospects capturing the interest of investors. Ahead of SuperReturn China, we spoke to Gunther Hamm, Partner, HOPU Investments, about the outlook for China's economy, how the geopolitical environment is impacting private markets in the region and how LP's are viewing China as part of their allocations.
Given the current geopolitical environment, what is the outlook for China’s economy and how have private markets responded to it?
At HOPU, we have a diversified portfolio across Asia. Within the region, China continues to demonstrate strong economic growth, maintaining its position as the second-largest economy in the world. Its growth rate remains significantly higher than that of many other regions, contributing to substantial incremental GDP in the area. This year, China has set an economic growth target of around 5% and unveiled plans to revitalize its economy.
We see ongoing opportunities in the Chinese market, a crucial component of any pan-Asia portfolio, including HOPU. Valuations of Chinese companies have declined, and debt remains inexpensive. Additionally, these companies are becoming increasingly cash-efficient, creating compelling opportunities for large global investors seeking investments with strong cash flow.
How do you expect recent developments in the US political climate to impact China-US relations and in turn the private market conditions? What should investors pay attention to?
While the US-China relationship remains complex, its impact on HOPU’s pan-Asian portfolio is limited, as the revenue of our businesses is primarily driven by local demand. This environment also presents unique opportunities for investors, with many global companies exploring buyouts and carve-outs to find effective solutions for their operations in China. This trend has also opened the door to strong partnerships with investors looking to invest in China and Asia.
For instance, GLP, one of our pan-Asia portfolio companies with a global footprint, has recently finalized the sale of its international business, GCP International, to Ares Management for ~US$3.7 billion as Ares looks to build out its Asia footprint. This transaction marks one of the largest deals in recent years, signaling robust demand for high-quality businesses and highlighting the strong partnerships between global companies and investors.
What role does China have to play in the future of private markets in Asia and how are LPs viewing China as part of the allocations?
China is the largest economy in Asia and one of the fastest-growing economies globally, playing a pivotal role in the future of private markets in the region. For any long-term investor, China is an indispensable component of a pan-Asia portfolio. At HOPU, we have a balanced portfolio across the region – ~50% in pan-Asia and ~50% in China. This strategy is ideal as it not only diversifies risks but also allows us to capitalize on the unique opportunities each market presents. We have consistently returned capital to our LPs; for example, our 2018 fund is on track to deliver a 0.5x DPI by Q2 2025, compared with a market average of 0.15x.
Our investments also align with Asia’s industrial priorities while avoiding high-risk sectors such as fintech and education. Our portfolio companies are characterized by strong operating models and diversified revenue streams throughout Asia, coupled with a strong commitment to governance. Additionally, we leverage our international exposure alongside local expertise to navigate the complexities of the Chinese market.
What are the biggest sectors and trends for growth in China?
China remains a key regional driver in the adoption of new technologies, with robust policy support and a strong commitment to advancing its technological capabilities across various sectors. At HOPU, we strategically focus our investments on sectors that benefit from this growing government backing, particularly in areas such as AI. This approach allows us to capitalize on opportunities presented by technological advancements while contributing to the broader goals of innovation, modernization, and sustainability in the country.
One of our portfolio companies is Arm China, the Chinese subsidiary of a leading global semiconductor development and service platform. Arm China plays a pivotal role in enabling the rapidly emerging AI ecosystem in the country. Through our strategic involvement, we have provided the company with the ‘Best of Both Worlds’ – combining a strong local business development network with a globally recognized brand and technology ecosystem. The company experienced significant growth, tripling its revenue between 2017 and 2022.
What are you most excited for about the upcoming SuperReturn China?
SuperReturn has long been a prestigious event in the private equity industry, and I am honored to be invited as a panel speaker once again. The event provides exceptional insights into the latest trends and developments within the sector.
I look forward to reconnecting with our LPs, peers, and close industry friends at the event. I am particularly eager to exchange views with Gary, Frankie, and Fabio on the future of China’s private market and the factors that will shape the industry in the coming years.
We have also seen renewed interest from global investors in China, driven by recent advancements in AI technologies and the emergence of the country’s buyout market. As a result, we believe the country will remain a focal point for growth and strong returns.