While China may not be decoupled from the effects of the global recession, its venture capital and private equity markets slowed to just below broader economic growth in 2008 and the amount of capital under management of most of PE houses hit record lows.  Lawyers are of the view that PE activity is ideally placed to rebound more quickly than other economic activity, not only because funds there are relatively less exposed to the international financial crisis but also because for some companies, a PE injection may be the difference between sinking or swimming in 2009.

"PE funds are relatively less exposed to the financial market meltdown than hedge funds, [and that is why] China is seen by many as the hope behind an early rebound," said Jonathan Zhou, a partner at Chinese law firm Fangda Partners. "Historically, large buyout funds have been relying more on their limited partners' funds and less on borrowed money therefore their China investments are less impacted by the tight debt market."

Add to this the government's decision last year to allow the country's National Social Security Fund and other types of financial institutions to carry out equity investment and the concomitant rise in both RMB funds and alternative investment sources this continues to open doors for VC and PE firms and a mid-term rebound looks a sure thing.

But when activity bounces back, said Zhou, it won't be the same type to which PE players and their lawyers have been accustomed to in the past, with more attention focusing on assets already under management. This isn't to say small size deals won't be on the cards, it simply means that investors will cautiously and conservatively looking  at long-term steady growth rather than the once popular 'jump-in, jump-out' pre-IPO financings.

"Clients will shift their strategies away from 'buying in anticipation of a quick IPO' towards maintaining their investments in companies for much longer periods and turning their investments in companies for much longer periods and turning around the business when the credit circle turns," said Zhou.

So should we expect to see PE investors in China acting more like value investors and less like arbitrageurs? The early signs indicate a sea-change in PE players' behaviour is already underway, with instances such as China International Corporation's establishment of a RMB2.9bn fund JV with Shanghai International Group and an unnamed Chinese PE player's interest in acquiring GMs 'Hummer' brand seemingly confirming such an hypothesis.

But the latter is also evidence of another type of PE activity we should expect in the short term- PE's continued investment in distressed companies, both abroad and in China.

"For those companies in China that are suffering PE injections are definitely welcome and may in the short-term be necessary," said Jeanette Chan, a partner at Paul Weiss and head of its China practice group and Asia communications and technology practice group.

With the pre-IPO investment avenue closed off (for now) and the possibilities for minority growth capital investments becoming increasingly limited we may well be forgiven thinking that the dearth of opportunities will actually aid the development of the PE investment industry in China, helping it up the number of control transactions effected bringing it more in line with the PE sector in developed economies in the region such as Hong Kong, Japan and Australia.  

Announced PE investments (Asia Pacific) - 4^th quarter 2008 - by jurisdiction