An improving equity market and strong appetite from strategic buyers are heating up activity in China's private equity market.
M&A involving China totalled US$340.2bn in the first nine months of this year, up 80.3% year on year, according to LSEG Deals Intelligence. Domestic M&A accounted for US$300.5bn, marking a 106.3% year on year increase, while Chinese outbound M&A grew 29.6% and foreign acquisitions of Chinese companies declined 28.2%.
In November, Chinese-focused private equity firm Boyu Capital Holdings and Starbucks Coffee announced a plan to form a joint venture to operate Starbucks' retail outlets in China. Boyu will hold up to 60% in the JV, while Starbucks will retain the remainder and will continue to own and license the Starbucks brand and intellectual property to the new entity. The deal was valued at US$4bn.
"China is a large accessible market which represents deep value for the right companies to invest in by sponsors," said Raghu Narain, head of investment banking for Asia Pacific at Natixis. "It also has a strong exit opportunity through capital markets either in Hong Kong or domestic China or through the M&A track for sponsors to exit and realise their returns."
Exit hopefuls
Bankers say that these mega transactions are a signal that firms are growing more hopeful regarding exits and rising stock market valuations. The Hang Seng equity index is up around 28% this year while the onshore CSI 300 index has gained 15%, and IPOs have resumed.
“Exits have not been easy the last few years – with Covid, depressed share prices and consumer sentiment being at an all-time low. Capital markets were not cooperating until now. Next year, with the IPO market already coming back in recent months, I think that could be revisited,” said Samson Lo, head of mergers and acquisitions for Asia at UBS.
And IPOs are not likely to be the only exit path. While Hong Kong IPOs may be a release valve for some assets, China's domestic IPO pipeline remains constrained, said Kher Sheng Lee, co-head of Asia Pacific at the Alternative Investment Management Association.
Chinese strategic buyers are emerging as a simpler, quicker exit avenue.
“The centre of gravity for exits has shifted onshore. Cross‑border exits face intense friction and regulatory hurdles. Selling to domestic strategic partners, especially in sensitive tech or data‑heavy sectors, has become the dominant strategy. It offers speed and certainty," AIMA's Lee said.
“The game plan is for them to acquire first because it is easier for them and then ultimately, maybe further down the road say four to five years later when China opens up again, there is this idea of selling them back to maybe some of the Chinese strategics,” UBS's Lo agreed. “Besides, these are good assets to begin with."
Competitive environment
High-quality assets for buyouts "are hard to come by – so when they do come by it is extremely competitive. And China private equity [firms] are more aggressive when it comes to China assets than a [global firm’s] China PE team,” Lo said.
When Starbucks was evaluating potential local partners earlier this year, HongShan Capital Group (formerly Sequoia China), FountainVest Partners and Primavera Capital — all Chinese private equity firms — were among those in the running, as well as US investment firms Carlyle Group and KKR Group. But in the end it came down to Carlyle and Boyu, according to media reports.
“Assets that were previously not available for sale are becoming more accessible for domestic sponsors buyouts,” said Miranda Zhao, head of M&A for Asia Pacific at Natixis. “Some multinationals are derisking or unlocking value by forming partnership with local financial sponsors, while some are evaluating market entry or expansion leveraging the current lower valuation.”
Experts agreed that going with a local partner makes sense for multinationals in China. Betty Yap, Linklaters’ corporate partner and global co-head of financial sponsors, noted that the shift towards control-oriented transactions from private equity houses also underscores growing confidence in operational value creation strategies.
“Chinese GPs bring to bear much valued local market intelligence, regulatory acumen, and operational capabilities essential for navigating China's intensely competitive landscape,” she said.
Natixis's Narain agreed. Global enterprises investing in China need to consider geopolitics and uncertainty over tariffs and a hyper-competitive domestic market, while also weighing the fact that a domestic private equity firm may be better at finding investing opportunities to begin with, he said.
Boyu, HongShan, FountainVest and Primavera did not respond to requests for comment on the Starbucks deal or China's private equity market.