While China's private equity firms still face onerous challenges this year due to economic growth pressure, fewer initial public offerings and continued divergence in valuation expectations, they can still look for opportunities in emerging industries such as artificial intelligence and multinational company spin-offs, said market consultancy Bain & Co.

Despite existing difficulties in fundraising, Chinese PEs are searching for more valuable investment sectors, including AI, said Bain &Co's survey report released on Tuesday.

About 25 percent of surveyed Chinese limited partners (capital providers), general partners (capital managers) are looking for investable assets in the AI sector. Meanwhile, 33 percent of Chinese GPs and LPs are keeping an eye on generative AI's impact on due diligence processes for potential deals.

GPs on the sell side now face increasing urgency related to exit strategies. But IPOs, which are a major exit option channel for PEs, have become stagnant in the A-share market.

According to professional services provider Deloitte, only 30 IPOs were made in the A-share market in the first quarter, down 56 percent year-on-year. Proceeds raised also contracted 64 percent year-on-year to 23.6 billion yuan ($3.3 billion).

Against such a backdrop, the industry now has more frequently opted for secondary funds, which sometimes involve strategic mergers and acquisitions, said Nancy Zheng, a Shanghai-based partner from Bain Greater China PE practice.

Bain & Co said about 79 percent of Chinese PEs will conduct more M&As this year or remain the same level as in the previous year. The stable and low interest rate environment in China, more business spin-offs, the entry of more assets in the market, the large amount of capital held by PEs and lower transaction multiples may result in a rebound in the Chinese M&A market, said the consultancy.

Acquiring post-spin-off business divisions from foreign firms' China operations will also become another emerging investment theme for Chinese PEs, as most of them are quality and mature assets, Zheng said.

Deals in overseas markets will also gain in popularity among Chinese PEs. Latin America, Oceania and North America are among popular investment destinations, she added.

According to Bain & Co's report, deal activity in the Chinese PE market fell to a 10-year low in 2023. Total annual deal value stood at $41 billion last year, down a dramatic 58 percent compared to the five-year average between 2018 and 2022.

But this is in line with the global trend, as the world has been undergoing an economic slowdown and rising macroeconomic uncertainties, said Zhou Hao, head of Bain & Co Greater China PE practice.

Last year, renminbi fundraising reported a modest 5 percent annual growth. But China-focused dollar fundraising plunged 44 percent year-on-year. Key reasons are LPs tightening their purse strings and directing their money to other regions. Some established dollar GPs have thus ventured into the RMB market for additional fund sources, particularly in insurance and private wealth management, according to the report.

[email protected]