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COVID-19: Pressure Points: The impact on private equity (China)

06 April 2020 | China
Legal Briefings


Amidst the challenges of delayed deals, volatility and weakened buyer appetite, market players are cautiously predicting that the COVID-19 crisis may trigger increased activity for Asia’s cash-rich private equity funds – once the human and economic impact of the outbreak subsides.

Record levels of dry powder from previously raised funds has been a key feature of the China private equity market in recent years, with the industry sitting on US$350 billion in June 2019.

More risk-adverse investors are adopting a ‘wait-and-see’ approach until public markets have settled and prices have stabilised, while many funds are focussed on securing and protecting their existing portfolio companies. Some of that dry powder may be allocated to business continuity strategies, such as securing funding obligations, rather than new investments.

Others are already evident in the markets. Dealmaking in China is already rebounding, with over 60 venture capital deals recorded in the last week of March 2020. While the practical aspects of acquisitions remain tricky, deals are being done.

Predictably, some will simply be seeking lower post-COVID valuations, but some sectors have proven their worth and extended their markets during the crisis. Technology, healthcare, biotech, e-commerce and productivity companies will be popular and competitive targets for future investment.

Market sentiment

Given the uncertainties associated with the COVID-19 outbreak, most private equity firms have been cautious in making investment decisions amidst the current downward shift in global growth outlook.

BlackRock announced that it has reduced its global equity and credit exposure, and shifted its stance from moderately overweight to neutral, but expected a rapid rebound in market activity once the disruptions dissipate. Whilst the market gyrations are reminiscent of the 2007-2009 global financial crisis, the chairman of BlackRock believed that the economy would recover steadily, especially with the recent efforts by central banks and governments to enact fiscal stimulus measures.

China-based CEC Asset Management also seemed cautiously optimistic. Its managing partner said the outbreak would slow down the private equity market in China, but also create a huge opportunity to purchase the stake of its investment portfolio competitors at low prices after the crisis.

Many private equity firms have built up significant distressed debt funds in recent years and are ready to pick up assets at lower valuations than would have been possible before.

Venture capital

Chinese start-ups experienced difficulties raising funds when stringent lockdown measures were in place. China’s travel restrictions and compulsory quarantine measures halted many investors’ plans to meet personally with the founders of target start-ups.

According to PitchBook, the deal volume and amount of capital raised in China during the first six weeks of 2020 fell by more than 60% compared with the same period in 2019.

Despite the slow start to the year, dealmaking in China is mounting a comeback. PitchBook’s data showed that there were 66 venture capital deals for the week ended 28 March 2020, just below the figure from the same period last year.

Recent reports indicating a slowdown in COVID-19 infection rates in China has reignited the investment appetite of various fund managers in purchasing Chinese assets, which is an incremental  sign of optimism in the sector.


Acquisitions have been impacted by the COVID-19 outbreak. We are seeing deals slow down or halt as the market tries to evaluate the impact of the outbreak on valuations. This applies not only to those transactions involving Chinese targets and investors, but also deals within Asia generally that do not have a Chinese connection, such as in Southeast Asia.

According to Refinitiv, private equity activity in Asia-Pacific is at its slowest pace since 2012, recording US$1.5 billion in deals from the beginning of this year to 10 February 2020. Data from Dealogic shows that the number of M&A deals involving Chinese entities from the start of this year to 11 February 2020 dropped by one-third to 356, and the total deal value decreased approximately 70% to US$18 billion in comparison to the same period in 2019.

Bankers have seen private equity buyers deferring acquisitions with a view to potentially acquiring assets at a lower price later, while some private equity sellers are simply waiting for a rebound in market activity. Bidding deadlines and transaction timetables are being extended.

On the plus side, given private equity firms and certain lenders are holding plenty of dry powder, this should facilitate deal-making in the short-to-near term. Some industry analysts expect that deal levels will rebound in the second half of the year.

Issues that could dampen acquisition activities include limited debt financing and the inability to undertake physical site visits and due diligence due to social distancing policies, travel restrictions, national lockdowns and work-from-home arrangements.

Despite these restrictions, creative workarounds exist – such as virtual site visits or mobilising local teams to undertake site visits rather than the centralised deal team. The fact that deals are still being done indicates that it is still possible to put an acquisition or auction process together, despite longer timetables and tougher conditions for deal teams.  

Please see this article for more insight into the pressure points arising from COVID-19 and how it might impact M&A execution.

Distressed assets

The outbreak has hit the travel, entertainment, traditional retail and energy sectors hard, with a considerable number of market players struggling with cashflow problems.

Distressed deals are becoming a popular instrument for growth and expansion amidst a sluggish global economy. Many private equity firms are actively seeking deals to snap acquire public companies at lower prices. Investments, especially private investments in public equity (PIPEs), may be more attractive investment options than change-of-control transactions.

Hidden gems unearthed

The COVID-19 outbreak has caused a shift in consumer preferences and a stark reliance on technology. Certain sectors will benefit – healthcare, biotech and pharmaceutical, e-commerce, online streaming media, and productivity applications (eg remote working tools and online edtech apps).

Many of these businesses have recorded a spike in users and high market penetration rates suggest a shortened investment cycle to private equity investors, making these companies appealing targets.

Investors’ interests in the healthcare, medical R&D and pharmaceutical industries are unlikely to fade with the end of the pandemic. With people increasingly mindful of the importance of quality health, private investments in Asia’s healthcare sector had already experienced significant growth in the past decade. The healthcare industry, in particular biotech, are likely to remain high on investors’ priority lists in the coming five years.


The COVID-19 outbreak has undoubtedly caused significant disruptions to businesses and society at large, and hampered private equity investors’ ability to proceed with investments.

The length and extent of these disruptions remain uncertain, and have prompted investors to remain cautious in progressing existing deals, while concurrently focussing efforts on securing and protecting their existing portfolio companies.

Fund managers need to analyse portfolio companies’ risk profiles, including in terms of reduced demand, supply chain or other operational disruptions, workforce issues and financial stability. They may prefer or need to (if the business fundamentals can justify it) allocate dry powder to business continuity strategies, such as securing funding obligations, rather than new investments.

However, some market players perceive this drag on economic activities as transitory, and remain hopeful for a speedy rebound in market activity once the disruptions dissipate. We are already seeing this rebound in activity as businesses start operations again in China.

The private equity landscape is not all doom and gloom. Some firms are preparing to acquire businesses with great potential at a lower price, whilst others are actively seeking opportunities to invest in sectors (such as healthcare and biotech) that answer consumers’ changed preferences and demonstrate resilience during these challenging times.

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