China Private Equity Targets Automotive Services

China's first fund to invest in automotive services will start next month, and its earnings will depend on strong growth in car-related businesses such as leasing, logistics and exhibitions. The advent of this fund shows that the emerging private equity industry in Mainland China is improving.

The Shanghai Automotive Industry Fund plans to raise a total of 30 billion yuan (4.6 billion U.S. dollars) and the first phase of operating capital is 5 billion yuan. The fund said it hopes to make its first deal in August but is unwilling to disclose the details of the deal it is targeting.

The Shanghai Automotive Industry Fund is jointly organized by the China Machinery Industry Federation and the Shanghai Jiading District People's Government. The advent of it indicates that with the development of the domestic service industry, China's first time the fund will target mergers and acquisitions from simple automobile production to potential automotive-related business areas. It also shows that China's private equity fund investments are becoming increasingly diversified and began to look for growth opportunities in China's relatively immature service sector.

Howhow Zhang, head of research at Shanghai-based Z-Ben Advisors, said: "At present, China is launching many similar private equity funds, but they are targeting different industries; in general, their The performance is very good. Some private equity funds focus on, say, agriculture and other service industries, but they are basically still in their infancy."

Most of China’s private equity funds’ previous investments were those that the Chinese government identified as critical to the country’s future growth, or to the restructuring of state-owned enterprises.

However, the Shanghai Automotive Industry Fund represents a new starting point: Funds to explore opportunities in the initial stage of the market. At present, China has become the world's largest automotive market. Last year, the total automobile output exceeded 18 million.

Analysts said that due to the growth potential of China's auto industry (which is expected to reach 35 million vehicles in the next 10 years), the Shanghai Automotive Industry Fund’s target of RMB 30 billion is not excessive. Due to China's lack of a long-term investment culture, the RMB-denominated private equity funds in China have been difficult to achieve in the past 18 months. Most funds in China attract investors looking for short-term trading opportunities, further hindering the maturity of the service industry.

Focusing on more open industries – those industries that have a market that is directly dependent on consumers, operating normally and transparently – are often better than funds that invest in government interventions and have strict regulations. Zhang Haochuan said: "It depends on where the fund is established and who is established." He added that if the political risk is greater than the commercial risk, then the fund tends to perform poorly.

“Those funds that were set up in less developed rural areas, usually local governments, to build local or foreign investments are difficult to achieve because they have no investment infrastructure at all.”

In contrast, funds established in coastal areas with more mature industries (generally focused on consumer goods, Internet technologies, or new energy sources) have always been able to bring substantial returns to investors. Zhang Haochuan said: "These industries are also more likely to arouse the resonance of global investors."