Private Equity in China

A Comprehensive Overview

Ameya Patkar Ahmed Tariq Piedong Qui Syed Ibaduddin Hyder

Contents
Introduction .................................................................................................................................................. 2 Deal Origination ............................................................................................................................................ 2 Private Equity Structure and Rising Competition ......................................................................................... 3 Tight Regulatory Implications and Way Forward.......................................................................................... 4 Opportunities & Challenges .......................................................................................................................... 5 Opportunities ............................................................................................................................................ 6 Challenges ................................................................................................................................................. 8 Attractive Investment Sectors .................................................................................................................... 10 The VIE Structure ........................................................................................................................................ 10 Recent Issues of VIE .................................................................................................................................... 11 Future of VIE and China PE ......................................................................................................................... 12 SETTING PRECEDENCE FOR THE FUTURE OF PRIVATE EQUITY ................................................................... 13 TRENDS........................................................................................................................................................ 14 REFLECTIONS: GOING FORWARD................................................................................................................ 16 BIBLIOGRAPHY: ........................................................................................................................................... 18

Introduction
Chinas accelerated economic growth in the past decade has led to unprecedented expansion in bank lending and bond issuances. However, these sources of financing have not fully bridged the financing gap faced by Chinese companies, therefore private equity played the role as an additional source of capital for Chinas corporate sector. Also, investors with surplus capital have viewed private equity as another asset class and have taken private equity exposure in an emerging market like China for diversification purposes (Alexander & Casey, 2012). The PE firms are driven by Chinas positive IPO environment and high exit multiple valuations giving a potential exit plan for their private equity investments. Other exit strategies like private sale have also been faring well but IPOs have been more dominant in China. This report intends to portray a holistic view of the private equity space in China deal origination, structuring, investing and divestment in China. It then discusses the various opportunities and challenges and attractive investment sectors. Moreover, it sheds light on how wills government interpretation and public discussions on VIE (Variable Interest Entities) change the fundamental aspects of the industry and finally dwells upon the future of Chinas private equity market? Trends and prospects

Deal Origination
Potential deals in China are a lot to begin with however there are enormous challenges in the Chinese private equity market. According to John Zhao (CEO of Hony Capital), structurally speaking many small and mid-sized companies in China lack good management, proper accounting procedures and maintain multiple sets of books, which makes due diligence procedures lengthy and difficult for PE firms (Economist, 2012). Essentially with so much competition in the market from other PE firms, closing the deal sooner is a priority for PE firms especially when a lot of capital from domestic and foreign investors is chasing deals in China. Apart from this constraint, the quality of management conflicts with the aims and objectives of PE firms in China creating agency problems for PE firms.

PE market in China has witnessed a drop in fundraising and investment activity in 2012 as per needs and opportunities arising in the Chinese economy (Lee, 2012). This may sound alarm bells for various PE firms already invested into Chinese companies because lower capital and deal flows may shake their confidence in staying invested and may launch clauses to exit their investments. Even though Chinas growth is forecasted to be slower than before in 2013, its GDP will still be growing at six to seven percent which is sufficient to sustain the level of opportunities for PE firms as investment grade companies provide at least double the growth rate and healthy returns (Lee, 2012).

Private Equity Structure and Rising Competition

Allen Lee (2012) has categorized PE funds in China into four groups: 1. Affiliated funds: captive or third party funds managed by affiliates of institutions 2. Princeling funds: known for links to prominent and influential Communist officials with vast network access and strong political clout 3. Independent funds: with no corporate or political affiliation 4. Foreign Funds: US-dollar denominated funds headquartered outside of mainland China This categorization carries importance because in China affiliation with different centers of power is important as it speeds up approval & execution of transactions by the government. Therefore existing foreign PE firms mostly endeavor to set up PE funds in partnership with local groups or firms in China (including state-owned enterprises or firms with connections). As opposed to spending time and money for due diligence, local PE firms rely increasingly on their network of contacts to form opinions and make decisions faster based on gut instincts in executing deals as compared to foreign PE firms, which further increases competition for foreign firms (Cheng, 2011). It is important to notice the extraordinary government support provided to growth of domestic PE firms so that all funds raised, invested and exited remain within China. Part of the reason why competition has increased is also because of the high number of domestic PE firms entering the industry where the government has allowed them to raise yuan-denominated funds and to convert corporate investment

houses to limited partnerships so theyre able to raise funds from wealthy Chinese individuals. On the other hand, the government has made it more difficult for foreign PE firms to invest dollar-denominated funds from offshore holding entities. (Gordon, 2013) This channel has clearly helped to make fund-raising even easier and more flexible for domestic PE firms. This way an advantage is given to domestic firms, which are already well rooted in the system and have the ability to quickly source and sign deals. (Gordon, 2013)

Tight Regulatory Implications and Way Forward

Competition in the PE industry is certainly healthy and shall go a long way to create a diverse set of firms to contribute to the long-term growth of companies in China. However, the tilt towards domestic firms clearly shows on how China still wants RMB funds to stay within China and restrict major portion of PE business with local limited partners. Such an environment may restrict the truer form of competition, as lesser PE firms from the rest of the world would want to set-up shop in China. But in the future it may be expected that with internationalization of the renminbi, China would be more open in inviting PE firms from around the world, including offshore holding entities, to invest in China. Relatively larger PE firms, like Blackstone, KKR, TPG and Carlyle Group still find their way through partnerships with local firms or business groups. Also, their scale and level of experience in private equity is unmatchable. Another competitive advantage held by foreign firms is the access to cheap capital due to low interest rates prevailing in their markets as opposed to higher rates in China (Gordon, 2013). This way through borrowing opportunities they are able to get hold of bigger deals, a space where not many PE firms venture in. This not only helps them to invest but create effective channels to exit their investments as well. In the partnership they may be able to sell their stake to the partner and exit the market, whereas on a standalone basis there are numerous regulatory issues that arise for foreign PE firms. To circumvent regulatory issues, the PE firms have teamed up with local governments in China to

raise yuan-denominated funds and invest in local companies (Gordon, 2013). This shows that despite barriers raised by the Chinese government, foreign PE firms are still interested in coming to China and have found different ways to counter disadvantageous measures taken by the government of China. The deal potential in China is still big enough to attract foreign PE firms and it is estimated by Bain Capital that the private equity industry in China still has $43 billion of deal potential to harness.

Opportunities & Challenges

The Chinese economy has witnessed one of the sharpest growth rates and has been one of the main drivers of growth for the global economy. The country of 1.34 billion people has a Gross National Income of $4,940 which has been consistently rising since 1993.

GNI per capita (current US$)

$6,000 $5,000 $4,000 $3,000 GNI per capita (current US$) $2,000 $1,000 $1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: World Bank Data As millions of people join the rank of middle income category they demand varied goods and services (Bunder, 2013); considering the significant size of the countrys population this presents a huge opportunity for companies to expand. Consequently this translates into opportunity for private equity firms that not only fill the funding gap for many of the businesses, which grew from mom and pop shops to size businesses, but also provide them with better managerial talent and expertise (Deng, 2013).

While the huge market potential provides opportunities for private equity firms in China, however at the same time numerous other factors present challenges for these firms.

Opportunities
The Chinese economy for the better part of its history has relied primarily upon its export as a driver for GDP growth; however the downturn in Europe and USA has had an impact on its export and China is now transitioning to a demand driven economy (Bunder, 2013). Nonetheless it should not be expected that the transition from an export led economy to a consumer driven economy would be a smooth one, especially owing to the uncertainty that surrounds the global economy, the following graph shows the annual GDP growth rate for China (Bunder, 2013).

The volatility in Chinas economy has resulted in reducing the public market valuations, the price to earnings ratios have declined from 17 time forward EBITDA in early part of 2011 to 12.6 times forward EBITDA by the end of 2012 (Bunder, 2013). This works like a double edged sword for private equity firms; while on one hand it results in lower exit multiples for firms, but at the same time it also lowers the

value of target firms at this point in time and therefore provides the opportunity to earn higher multiples from these in the future. The following graph shows the decline in forward price to earnings ratio for Shanghai A shares in 2011 and 2012 (Bunder, 2013):

Another byproduct of the declining stock market multiples is the pressure on stock prices of listed companies which find it better to take their company private. Furthermore, falling multiples is not only a feature that is common to Chinese stock exchange only but also to other stock exchanges as well. One such example is that of Focus Media that was taken private for $3.7 billion. The company which is based out of Shanghai was listed on the Nasdaq in 2005 at an average multiple of 35 times forward earnings, however by 2012 the stock had come under pressure and the companys forward multiple had gone down to 8.3 which seemed attractive to the consortium of The Carlyle Group, CITIC Capital Partners, Fountainvest Partners and China Everbright to bid for the company (Bunder, 2013). Distressed assets also provide an opportunity for private equity funds to enter the Chinese markets; the Private Equity round up for China by Ernst & Young states that a significant number of financing for firms in China comes in the form of bank loans and some of these would turn into non-performing loans. This presents an opportunity for private equity funds that have the risk appetite to invest in these

distressed firms and turn them around. Reportedly two funds to the tune of $4.6 billion were raised in 2012 to finance distressed assets (Bunder, 2013). Moreover, some regulatory forces have also worked in favor of private equity firms in China. One such example is that of China Insurance Regulatory Commission (CIRC) which in 2010 allowed Chinese insurance companies to invest up to 5% of their assets in domestic PE firms which unlocked insurance industrys pool of an estimated value of $ 1 trillion. This regulation was further relaxed by the C IRC in July 2012 and allowed insurance companies to enhance their investment in PE firms up to 10% of their assets and in October 2012 this the CIRC issued regulations which allowed insurance companies to invest in foreign PE funds as well (Bunder, 2013). As a result the National Social Security Fund (NSSF) announced that it would enhance its investment in PE funds by more than 50% from $3.1 billion to $4.8 billion by the end of 2012 and as of September NSSFs investment in PE funds had risen to $3.7 billion.

Challenges
The Private Equity industry in China faces a number of challenges. The biggest and immediate challenge that PE firms face is their ability to exit via IPOs. The China Securities Regulatory Commission (CSRC) stopped the process of approving listing of companies in October 2012 in a bid to reform and stabilize the domestic market. According to estimates there are more than 7,500 unexited private equity investments in China from deals executed since 2000 (Rabinovitch, 2013). While delay in exit is one obvious consequence of the halt on approval process, this has already created significant problems for PE firms that were solely focused on taking advantage of the arbitrage between the private and public valuations and therefore operated on the business model of investing in companies and then taking them public in a short time to unlock huge returns. One such example is that of Kunwu Jiuding Capital that looked for companies that were most suited for an immediate IPO. This model allowed Jiuding to earn returns up to 600% at times and made it into one of the largest PE firms in China with a capital of over $1 billion. Considering the short time it took to make exits, Juiding promised investor to return their capital within four to six years which is half the time promised by firms such as Carlyle or Blackstone. However, the

recent block on the approval process puts a significant pressure on PE fims like Jiuding Capital (Fuhrman, 2013). Another side effect of the break in the IPO process is the fact that it makes it difficult for PE firms to raise funds, especially mid-tier funds that find it difficult to convince limited partners to put up money ("China pe industry," 2013). PE firms in China face another challenge, which might be minor in comparison to the other obstacle is that going public is considered more prestigious than being bought by PE firms (Deng, 2013). Regulatory oversight is another development that the private equity industry in China faces. The CSRC has issued draft revisions to Chinas Securities Investments and Funds Law which would treat PE funds as securities and would require more disclosure from PE firms (Bunder, 2013). Moreover, the regulatory environment makes it difficult for foreign private equity firms as well, especially in terms of repatriation of fund from China. Exit proceeds are subject to review by State Administration of Foreign Exchange (SAFE) and the proceeds should equal the reasonably expected returns from a legitimate transaction in China (Deng, 2013). Furthermore, the dividends or exit proceeds should be repatriated in a timely manner or risk being viewed as disguised foreign loans. Judy Deng in her journal article published in the Journal of Private Equity in summer 2013 states the following: According to Chinas foreign currency regulations, a foreign loanthat is, a loan extended by a non-Chinese party to a Chinese partymust be registered with SAFE as a capital account item. A disguised foreign loan is a loan extended directly or indirectly by a non-Chinese party that is not registered with SAFE. It is anticipated that disguised foreign loans could attract more scrutiny in the future when the pressure on renminbis appreciation is more significant. By the same token, if the exit proceeds are recycled for reinvestment in a Chinese entity and if such reinvestment is completed without the approval of MOFCOM, the relevant Chinese tax authorities could challenge the transaction on the same grounds. Apart from the regulatory oversight, Darek Klonowski in his article, Private equity in emerging markets: The new frontiers of international finance, noted that private equity firms are often subject to politically

driven process and that experts believe that the recent political change might be less open to foreign investment (KLONOWSKI, 2013).

Attractive Investment Sectors

In its report titled Asia Pacific Private Equity Outlook 2013, Ernst & Young surveyed 50 private equity general partners, 30 institutional investors (LPs) and 20 private equity investment bankers on their outlook for private equity in 2013. The respondents to the survey believed that Energy, mining and utilities, Consumer and Technology media and telecommunications will witness the greatest amount of private equity activity in the coming year. This is not surprising considering the burgeoning middle class in China which has more discretionary income and therefore would have a significant demand for the services provided by the three sectors identified above (Buxton, 2013). This is further supported by the fact that Hony Capital recently established a fund to the tune of 3 billion yuan ($489 million) with Shanghai Media Group to invest in production of film and television series, which is expected considering that revenues from the media and culture industry are expected to reach 3.2 trillion yuan (5% of GDP) by 2015 (Cheung, 2013). Similarly National Film Capital has raised a 1.5 billion yuan fund to build movie theaters across the mainland (Cheung, 2013). Another testament to the focus on telecommunications industry is CVC Capital Partners investment in Hong Kong Broadband Network which provides high speed broadband and other telephony services to more than two million customers (Bunder, 2013).

The VIE Structure

VIE (Variable Interest Entities) has been well known in China PE markets since Sina was listed in NASDAQ in 2000 which is also known as the Sina-Model. It belongs to offshore listing, one of the two models for Chinese companies going for IPO (Initial public offering). The other one is onshore listing such as A-Share listing. The VIE structure is very common and many Chinese internet companies are using this structure to be listed on NASDAQ, NYSE or HKSE, which include Sina, Sohu, Baidu, Ctrip,

YouKu, Tencent, Alibaba.com (delisted in 2012) and LightinTheBox (the most recent Chinese company listed in NASDAQ on 6.Jun.2013) etc. The following graph shows a typical VIE structure (David, 2011). The offshore holding company holds a controlling interest over the domestic operating company through a series of contractual arrangements rather than through direct majority equity ownership (Donald, 2011).

The VIE structure helps the foreign investors to deal with Chinese regulatory restrictions on certain industry sectors such as Internet, telecommunications and media etc. It also helps the foreign investor to avoid the complicated approval procedure for a foreign direct investment. However owing to the unique contractual arrangements, VIE has always been under the arguments whether it is a legal and effective structure to sustain.

Recent Issues of VIE

The VIE structure came under much discussion in 2011 and 2012 after two Chinese companies encountered the issues related to VIE.

In May.2011, Alipay, an online payment company controlled by Alibaba.com, was transferred to a domestic Chinese company controlled by Jack Ma without the approval of Alibabas board, which included one board of director from Yahoo. The reason of the transferring ownership was because the Peoples Bank of China allegedly wouldnt grant the online payment permit to online payment companies that have foreign ownership, whether directly through equity interests or indirectly through the use of the VIE structure (Brain, 2011). Although Yahoo and Alibaba settled this issue by signing one agreement that Alipay would pay Alibaba 37.5% of the valuation when Alipay was going IPO, it was still unclear whether the permit would be granted to Alipay if it hadnt been transferred out of Ali baba. This incident shows the risk that Chinese authority still has the possibility to apply the regulation on the VIEs for the certain purposes and also show that this kind of contractual arrangements have a high risk. In Jul.2012, New Oriental Education and Technology Group (EDU), one famous Chinese private education firm, announced to restructure its VIE ownership (China.Org.CN, 2012). Chairman Michael Yu had taken back all the ownership of its VIE from the other 10 original shareholders who had left EDU. Although Michael Yu claimed the purpose was to help the holding company to have a clearer VIE structure only, SEC (U.S. Securities and Exchange Commission) still launched the investigation over its possible accounting irregularities. Although SEC claimed the investigation was towards EDU only not the whole VIE structure, the public still regarded this incident as the risk of VIE which had an unclear structure and ownership without the strict accounting regulation in general.

Future of VIE and China PE

Despite the hot arguments on VIE, LightInTheBox Holding Co., whose structure is also based on VIE, went for IPO in NASDAQ on 6.Jun.2013. The fact is that many Chinese companies listed offshore are still under VIE structure which includes giant companies such as Baidu with US$30B-$40B market capital. The VIE structure will be most likely continued for several more years until some clearer structure could take place in the China PE markets. However both foreign investors and Chinese companies founders should be aware of the risks of VIE structure when they are considering to construct one VIE company.

1. Change in regulation: There is still no real operational regulation from Chinese authority for VIE.
The risk is still remaining that Chinese authority may ban some of the permits from VIE in the future, which would lead to the similar issue as Alipays case. 2. The risk of contractual arrangements: Foreign investors have no direct equity ownership of the Chinese operating company and rely on the contractual arrangements only. It will be difficult for the investors to correct some management issue if any. There is also lack of complete law to handle such issues; therefore the rights of the foreign investors are not well protected. 3. There are still other risks such as lack of the complete accounting regulation, the risk of tax and the foreign exchange control etc. With all the kinds of existing risks, China PE markets may need to consider the effect of insufficient funds raised from the VIE structure in the future. One recommendation is to further formalize the VIE structure by clearly defining the regulations to reduce the uncertainty. The other possibility is to develop the local PEs. By providing the training and practicing grounds and also providing the certain policy support, it will help to grow the local PEs faster.

SETTING PRECEDENCE FOR THE FUTURE OF PRIVATE EQUITY

Since 2010, there were whispers over valuations, shortened initial public offering (IPO) durations, and a growing number of private equity applications, pending approvals and IPOs. In addition to the enigma that accompanied private equity (PE) deals, China Security Securities Regulatory Commission (CSRC) had also started looking into suspicious dealings pertaining to preeminent companies like Kunwu Jiuding Capital. The companys PE developing style was developed to perfectly adapt to the Chinese business environment. It did not look to assess its peers, industry, or strategic advantages. In fact, it only was on the look out for deals where it could essentially make a quick buck basically seek out companies that met requirements for an immediate domestic IPO. Most of the deals Kunwu Jiuding Capital undertook, took advantage of arbitrage opportunities with respect to large valuation differentials between private equity entry multiples and expected IPO exit valuations. In fact so blatant were the companys executives

that their pre-investment work consisted mainly of simulating the IPO approval process of the CSRC. If these simulations implied a quick speedy CSRC IPO approval, the company was given access to Kunwu Jiuding capital. The final objective cash out in less than two years. Clearer most shocking was the lack of direction and ignoring of private equity fundamentals and valuations. And strangest of all it actually worked for several years. The company made a large number of these deals on such investment philosophy and in many instances cashed in returns in excess of 600%. Realizing the potential goldmine they were sitting on, they went on with this farcical act and ironically became one of Chinas largest PE firms with over $1 billion in capital. (Fuhrman, 2013) Since mid-2011, CSRC decided to investigate into the activities of PE firms in China. Intent on cleaning up the act, CSRC authorities wanted to magnify the issue that PE companies could not predict, anticipate or hedge against the IPO process. With no clear indication of what it had planned, CSRC first slowed down the number of IPO approvals and on October 2012, halted IPOs altogether. This seriously affected the private equity industry in China and put a dent in the previous trend of Chinese private equity firms raising money and promising its RMB investors a return on capital within four to six years. In many positive ways, this reflected on the belief that CSRC authorities were intent on showing that undertaking an IPO should was a function of valuations, political and institutional policies and that these could not be predicted.

TRENDS
For almost a decade, the private equity market in China was as sexy as it could get. In fact according to statistics by China First Capital, 2001 to 2012 witnessed this market farming almost 10,000 deals at a combined value close to $230 billion (Gough, 2013). The year 2012 witnessed the Chinese Private Equity market going through major upheaval. And in 2013, we are now witnessing a decimated market, in which PE industry in China has lost a significant amount of its steam. Investments flowing in are close to zero and particularly interesting is the fact that Renminbi fundraising is almost non-existent. On the whole, this drop has accounted for a 50% year-on-year drop for capital entering China-focused vehicles as a whole.

Sadly, with negligible activity, the only beacon of light in 2012 was the $3.7 billion private equity tranche that formed part of Alibaba Groups $7.6 billion buyback from Yahoo. Gone are the days, when select investors were lining up for pre-IPO opportunities. In China, this has special been extremely lucrative for investors who were simply looking to buy and hold for the prerequisite average three-year period before finally selling after the lock up period with very comfortable valuation premiums. With returns around ten times the original investment, it was extremely normal for investors to even bribe CSRC officials to get the needed approvals. However times have changed drastically and this is no more the case. 2013 has witnessed CSRC demanding stringent conditions be filled by all applicants. Furthermore, the CSRC is now requiring underwriters of applicant companies to reinvestigate the authenticity of the filings. Taking a stand of this magnitude shows how serious the CSRC is when it comes to building a transparent private equity market in China. And so far this is beginning to show results - Out of the 600 applicants waiting for approval, 166 companies have already withdrawn their applications (Zhou, 2013). As it currently stands, thousands of private equity companys in China have pending applications at different stages in the process pipeline. And according to recent estimates, this is a nightmare scenario. Sources say that there are 100 companies that have approval are waiting to IPO, 600 with submitted applications waiting for approval pending CSRC investigation, 2,000-3,000 waiting to submit applications and 7,500 that remain un-exited. Sadly, the numbers only paint half the picture, reality only hits when confronted with the fact that CSRC has never approved more than 125 IPOs in any given year (Fuhrman, 2013). Adding fuel to this fire is a slowing economy that has given rise to a falling investor confidence and both individual and institutional investors are not keen on purchasing shares from IPOs. In fact 2013, has witnessed pre-IPO numbers falling from the lofty ten times average exit returns to currently two to three. To make matters worse, this lack of confidence in Chinese private equity has made its way to the US shores and even NASDAQ surprisingly is curtailing its once open door for Chinese companies. Adding to the NASDAQ woes, are accounting fraud scandals that further elicited a crackdown by the Securities and

Exchange Commission (SEC) - eventually making interest in new Chinese offerings even more unpalatable. Finally, adding to complexities - the issue of the lack of exit strategies in PE firms in China have always been a great concern to institutional investors and pension funds in the United States, Europe and Asia alike. With CSRC dropping the gauntlet, slowing down economic conditions, stricter laws and checks in place, the future for private equity in china is currently bleak. In essence, fears over cooked books, valuations and wrongdoings have made the IPO market a Russian roulette playground. A few analysts have in fact indirectly blamed the Chinese economy for the crazed demand and over-investing in the pre-IPO period.

REFLECTIONS: GOING FORWARD

With respect to prospects going forward, there seem to be mixed sentiments. Recent forecasts for slower growth, stricter CSRC regulations and changes in macro conditions all point to uncertainty about future economic policies and regulations with respect to the Chinese PE market. However many analysts in China and the west still feel, that Chinese GPs and LPs are optimistic and that the private equity industry in China will find its way eventually. The shake out should do more good than bad and the eventual results should fare better for companys wanting to IPO in the future. Using the thumb rule - investment grade companies would having growth rates that are twice that of the economy, indirectly supporting the sentiment of an achievable 12 13 % returns in China. The trend gong forward should be on how LPs focus on adding value - not simply providing capital, and waiting to simulate IPO approval processes like in the past. In the future, Chinese companies will need to adapt the quintessential private equity model, invest for longer horizons and actually valuing a company on medium to long-term prospects (Lee, 2012). Because of the lack of required due diligence mentioned above, I see the private equity market crippling over the next few years. For Chinese private equity market to develop, there has to a drastic change in the thought process of investors and authorities. In terms of the future, many analysts vision - Majority buyout as a developing

trend. Currently, the lack of well established debt markets in China do not support large LBO deals, but with the current sentiment of IPOs not picking up in the months ahead a lack of confidence for the market with investors not showing any interest in the IPO shares floated, buyouts should start to become more common in the years ahead. Direct secondary is another viable option that has gained momentum in the past year or so. Analysts feel that institutional and dedicated investors are on the look out for financing private equity investments in the secondary market. And although the market for secondary is still patchy, there are essentially firms like AXA Private Equity and Neuberger Berman looking to delve into the Chinese market going forward. Furthermore, global investment banks like Goldman Sachs and JPMorgan Chase, Morgan Stanley and few institutional investors are said to have an increasing appetite especially within China. An additional advantage of direct secondarys is that they complement the structure of private equity by increasing liquidity within the market (Zhou, 2013). Chinas private equity industry is definite at a turning point, unchartered territory of kinds. With the established pre-IPO model loosing its footing and regulators taking a firm stand, I see the private equity market taking time to evolve from this flux.

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