China's internet and technology sector will continue to be a hot draw among private equity investors, though the value and number of deals may slide in 2017 due to high valuations in the past, according to global consultancy Bain & Company.
Mega deals in this sector, accounting for half the total amount, helped push private equity investments in China to $49 billion in 2016, hitting its second best year on record, said Bain in its latest PE report published on Thursday.
Leading this wave were prolific investors such as Chinese internet firms, State-backed funds and State-owned enterprises, eclipsing the role of traditional private equity funds and venture capitalists.
Contributing to 10 percent of the total deal value, global PE players are losing out to Chinese financial institutions as well as internet giants, headed by Baidu Inc, Alibaba Group Holding Ltd and Tencent Holdings Ltd, which are shaping up to build their prospective business ecosystems through buyouts and strategic investments.
While the internet upsurge is likely to extend into 2017, high valuations will pose risks for returns and potentially cause a fall in value and the number of deals, said Han Weiwen, managing director of Bain Greater China.
"There is continued enthusiasm in investing in internet technologies and new business models that can disrupt and revolutionize traditional industries via online-to-offline endeavors, such as medical services and fresh food consumption," Han said.
He also noticed a shifting interest, from investing in online platforms to internet-related infrastructure, such as finance, logistics and technology services.
The two largest PE deals in China last year were $4.5 billion received by e-payment giant Ant Financial Services Group and $4.4 billion for online travel site Qunar.com.
In addition to the internet, the healthcare sector, education and consumer products are also viewed as potentially attractive target areas for PE.
Bain also predicted outbound deals cooling down given Beijing's tighter rules on overseas investments and stricter scrutiny of Chinese investment by foreign regulators, but added that the drop would only be temporary and affect mostly State-owned enterprises.
"The macro trend is still strong in terms of Chinese companies going overseas organically and through acquisition," said Michael Thorneman, senior partner at Bain China.
He called the Belt and Road Initiative "a big theme" that could spell opportunities for financial investors in areas such as logistics, transportation, advanced machinery manufacturing and services.
