China and India, the two most populous countries in the world, are dubbed as emerging Asian giants due to the potential growth of their economies. Preqin’s Funds in Market database tracks 141 India-focused and 529 China-focused private equity funds that closed from 2009 to 2015 YTD, raising an aggregate total of $21bn and $131bn respectively. Fundraising peaked in 2011, with 26 India-focused vehicles raising $3.8bn and 134 China-focused funds accumulating a total of $33bn. However, amid current economic decline, the number of funds raised with a focus on China has decreased from 66 to 32 from 2014 to 2015, while aggregate capital has declined from $24bn to $6.9bn. Similarly, India-focused funds have decreased in number from 24 to 18, and capital raised by these vehicles has declined from $4.4bn to $3.4bn.
Venture capital opportunities were the most sought after in both countries as shown in the chart below; 47% and 44% of funds raised in the last six years targeting India and China respectively utilized this strategy. This is followed by the provision of growth capital. Growth funds constituted 40% of vehicles investing in India, as well as 40% of China-focused vehicles. The difference between both economies lies in the third most preferred strategy, namely distressed (5%) for India and fund of funds and buyout (6% each) for China. For the former, companies in several core industries including steel, power, mining and infrastructure are facing high debt levels and are unable to service their loans efficiently, which leads to distressed opportunities. In China, however, fund of funds and buyout strategies are gaining popularity given the call for diversification from LPs and the implementation of ‘mixed ownership’ of state-owned enterprises policy.
The emerging giants are committed to being important players in the global economy. Both economies are undergoing strategic reforms such as changes to arbitration laws and bankruptcy code in India and capital-account liberalization in China. The pro-business Indian Government’s efforts to promote venture capitalism have seen a rise in incubators and angel vehicles across the country. Similarly, the Chinese Government has implemented a series of initiatives to develop the private equity industry, such as the ‘Seven New Strategic Industries’ and ‘Go Global Strategy of Chinese Enterprises’. China now faces the imperative challenge of sustaining growth, while a crucial task at hand for India is to build up its infrastructure, including recapitalizing its banking system.