As we hasten toward the end of 2024, it becomes increasingly evident how tumultuous the private equity landscape has beenThe numbers tell a sobering story: in the first half of 2024, a mere 47 private equity fund managers managed to register, representing just 20% of the figures from the same time in 2022. Meanwhile, the number of institutions that closed their operations skyrocketed to 605, roughly thirteen times the number of new registrations during the same period.

If we take a moment to reflect on the past decade, the private equity arena witnessed a seismic shiftThere was a notable dominance of RMB funds over USD funds, driven largely by the influx of government-backed guiding funds, followed by the restrictive measures imposed by new asset management regulations that severely hindered fundraising opportunities, leading to a near standstill in initial public offerings (IPOs) that effectively barred many exits

This rollercoaster journey has been peppered with highs and lows, painting a vivid picture of the struggles and triumphs within the sector.

The world moves in cycles of seasons, each carrying its flavor of bitterness and sweetnessIn 2024, we witnessed a transition from market-driven funds to state-owned enterprise (SOE) funds, heralding an era where these state-backed entities now dominate the first-tier marketAs we look towards 2025, the pertinent questions arise: What lies ahead for the private equity market? What proactive measures should stakeholders consider taking?

When discussing uncertainty, a multitude of layers emerges.

Significant sanctions imposed on Russia have instigated a profound reconfiguration of the global economic orderThis is notably evident in the decoupling of China’s high-tech industries, pivotal supply chains, and financial mechanisms from global networks, raising questions about the ongoing restructuring of international supply chains

• AI Agents Reshape Web3, Crypto Landscape
• Over a Trillion in Funds Has Entered the Market!
• Major Moves! The Stock Wizard's Buying Spree
• Bitcoin Surpasses $100,000 for the First Time
• Developers Vie for Prime Urban Land

The uncertainty accompanying this shifting landscape has escalated dramatically.

2. In the United States, financial policies have shifted towards a more protectionist stance, deepening the trend of de-globalization.

Predictions suggest that the Federal Reserve may adopt a gradual approach to interest rate cutsThe interplay of domestic policies seeking to stimulate the economy against contractions in labor and goods supply chains may result in re-emerging inflation in the U.SThis scenario may prompt the Fed to halt interest rate reductions or potentially raise them againThankfully, the strain of capital outflows has been navigated successfully in recent years, minimizing the repercussions of additional hikes on the market, as subsequent capital inflows post-downgrades could rejuvenate domestic financial markets.

3. Observing the Chinese economy, there appears to be a more aggressive stance towards fiscal policies coupled with moderately relaxed monetary policies.

The annual Central Economic Work Conference serves as the most reliable barometer for assessing the current economic climate and setting macroeconomic guidelines for the following year

Recent discussions emphasized a commitment to implementing proactive fiscal policies alongside moderately accommodative monetary strategies, enhancing our policy toolkit and reinforcing extraordinary counter-cyclical adjustments.

Emphasis will be placed on proactive fiscal policies, where an increase in the fiscal deficit ratio is necessary to ensure continuous and robust financial interventionsEnhancing expenditure levels, expanding the issuance of extraordinarily long-term special government bonds, and promoting local government bond issuance and usage are critical, despite tighter budgets at local levels.

Moderate loosening of monetary policies is also pivotalThe importance of both broad and structural functionality of monetary tools cannot be understated; timely adjustments in required reserve ratios and interest rates should ensure ample liquidity while aligning social financing scales and monetary supply growth with economic growth and overall price expectations

The Chinese government revisiting the notion of 'moderate relaxation' after a 14-year hiatus suggests a potentially significant influx of liquidity into the market.

The stark realities facing the private equity market are multifaceted and challenging.

The primary market now finds itself mired in a conundrum: fundraising efforts yield scant results, and investments made often lack viable exit strategiesEven when successful exits do occur, the financial returns are typically minimalThis scenario has birthed new challenges characterized by the nationalization of fundraising, standardization of investment strategies, and the emergence of exit-driven management tactics.

1. Nationalization of fundraising.

The total number of fundraising funds has plummeted by 49%, with state-owned banks comprising an overwhelming 81% of the remaining figures

The primary market has irrevocably entered an era dominated by SOEs, to the extent that even the appearance of China Merchants Fund has witnessed local governments and state capital commanding up to 99% of the limited partner (LP) share.

2. Standardization of investments.

Investment volumes reduced by 37%, with numerous institutions taking no action whatsoever, especially evident in the healthcare sectorAmong the remaining investments, a large proportion skewed towards semiconductors and artificial intelligence, reflecting a paradigm where funds now demand revenue-generating projects with profitability over innovative potential — essentially, investments have become formulaic.

3. Exit-driven management.

Post-investment management has lost its capacity to empower, now predominantly fixated on exits, be it through repurchases or mergers

The pressure to exit stems from poor DPI dynamics, severely hindering new fund-raising opportunities.

4. Merger-focused exits.

Following the Policy 925 Conference, which significantly bolstered acquisition efforts under relaxed regulations, a renewed fervor for mergers emergedHowever, projects lacking established revenue and profits struggle to find exitsIt seems that high valuations inflict self-harm, creating an unnerving deadlock for potential investors.

In terms of direction...

For those investment firms that continue to exist and aspire to grow within this tumultuous environment, being swept away by waves of optimism or pessimism shouldn’t be their primary concernInstead, they must focus on charting a new course amidst these difficulties

Multiple alternative pathways seem promising for general partners (GPs) to explore seriously.

1. Surplus capital must inevitably flow into the stock market.

A stagnant secondary market breeds hesitance in the primary market.

Addressing the barriers impeding mid-to-long-term capital flow into the market could enhance the inclusivity and adaptability of capital market regulationsThe central government has signaled positive intentions through various initiatives, aiming to restore investor confidenceThe A-share market's valuations have returned to a normal range; future developments hinge largely on the effectiveness of policy measures and improvements in economic indicators and corporate performance.

2. Surplus production capacities push firms towards international markets.

Expanding abroad has become an inevitable choice for Chinese enterprises.

Where can they expand? Europe has begun to recover from stagnation, with the Eurozone’s GDP demonstrating consistent quarter-on-quarter growth

Countries like France and Spain are showing strong performances while Germany and Italy experience some turbulence, and the UK’s economic momentum appears to be fading awayThere’s clear economic divergence within Southeast Asia, with Japan gradually recovering post-earthquake, while South Korea struggles with disruptions and Indian growth unexpectedly slows downIn contrast, Vietnam's GDP reflects a rebound, retaining stability in IndonesiaThere’s also divergence in Latin America, where Brazil’s economy has accelerated while Mexico's growth rate has notably decelerated.

The meeting emphasized the need to collaboratively build the "Belt and Road" initiative, underscoring a commitment to high-quality partnerships.

3. Surplus production capacities drive attention towards domestic consumption.

The conference has placed a pronounced focus on 'fully expanding domestic demand' as a primary undertaking, recognizing China’s most significant advantage under current circumstances: its massive latent consumer base and the unified market

This demand isn't limited to tangible goods but extends to service industries, as well.

China’s economy requires a transformative shift, innovating and expanding consumption models while actively fostering cultural tourism and other service sectorsPromoting emerging markets such as the 'first launch economy,' winter sports economics, and the gray economy is crucialNew developments will require a revamped approach to introducing new technologies and replacing outdated consumer goods.

On October 18, 2024, the establishment of the 98th state-owned enterprise was announced, with the China Resource Recycling Group being tasked with developing a national platform for resource recycling and reuse.

4. Elevating productivity leads to an emphasis on AI and data-oriented reforms in factor allocation.

The conference advocated for 'leading the development of new-quality productivity through scientific innovation and building a modernized industrial system.' Consequently, efforts to fuse technological innovation and industrial advancement will be paramount, encompassing initiatives like 'AI+' to transform traditional industries and increase efficiency through digital and green technologies.

Additionally, fostering a multi-tiered financial service ecosystem, enhancing patient capital capabilities, and attracting social capital into entrepreneurial investment should remain high on the agenda

It is crucial to address competitive issues rooted in an 'involutionary' mindset while regulating behaviors of local governments and firms, aiming to minimize inefficient investments.

The establishment of a new model for core competitiveness in the context of a new era is imperative.

In China, competition is always fierce, largely due to its vast population and relatively low labor costsThe degree of marketization for the pricing of goods and services has reached 97.5%, leading to rapid saturation even in emerging sectorsThis raises the critical question: how can we establish a new model of core competitiveness that is resilient and adapted to the challenges of the modern era?

1. The necessity for effective exit strategies.

IPO doors have shut tight (entrepreneurs find escape routes closed), and for investors, substantial pressure from LPs mounts with the fear of slow exits

Nevertheless, the windows for mergers and acquisitions as well as avenues into traded markets remain operational (when possible, consolidate; when feasible, go public without fixation on valuations).

aIntegration capabilities.

A holistic approach to forming cohesive partnerships with key stakeholders is crucialConsolidation requires efforts to blend compatible assets, ensuring synergies even when management overlap existsFinding companies with growth potential and sound cash flow is a sophisticated task, particularly at reasonable valuationsGood businesses always remain scarce, especially those that are both high-quality and low-cost.

bMerging similar businesses.

Integrating similar entities under a unified shareholder approach can yield valuable synergies, although such schemes are rarely simple to enact.

2. Transitioning in new dealings.

a

The evolution of general partner (GP) relations.

Regulatory changes have minimalized funding avenues from banks, pushing wealthy families towards overseas investmentsRecent concerns surrounding high-net-worth investments have led to some failures in the marketHowever, the domestic primary market's accessibility to SOEs, industries, and AIC channels is now clearer (though many SOEs aim to act as GPs themselves). The division among funds has become starkly evident—some easily generate 5 billion while others struggle with even 500 millionThere is a need for renewed emphasis on GP relations while shifting to new fundraising strategies, adapting to ensure alignment with the governance of local funds.

bChoosing new sectors wisely.

Emerging trends such as low-altitude economies, humanoid robotics, and AI-driven processes are gaining traction rapidly

Nonetheless, sectors that once appeared promising like healthcare, chips, and renewables are often found to be riddled with scams and failuresAlthough investments may contribute positively to industry overall, they might not yield the returns sought.

3. Strategic transformations.

aRedefining market positioning.

In an age where state-owned enterprises dominate, smaller GPs must recalibrate their strategic positioning while rethinking their fundraising, investment, operation, and exit strategies appropriate for a bear marketIf historical approaches remain stagnant during bearish times, navigating towards successful outcomes becomes almost impossibleScaling big presents challenges, but shrinking operations into specialties can result in resilience and adaptability in challenging environments.

b

Identifying turning points.

In the words of Zhou Hongyi, turning points reshape rule sets and catalyze new markets, demands, and business modelsRecognizing and capitalizing on these critical environments offers previously unseen opportunities.

Opportunities abound in various sectors—AI applications, international expansion, aging demographics, and new media channels—though success hinges on the ability to quickly pivot one's competitive edgeStripping away from comfortable zones, letting go of relic resources, and embracing new endeavors are difficult yet necessary steps towards meeting the demands of the current epochThus, organizations, like investment firms, must remain agile in response to the shifting tides of market realities.

The conclusion.

Amidst the reality that financial circumstances remain in flux, practitioners find their spirits worn down while the unemployed navigate uncertainty