Summary: http://www.chinamoneypodcast.com Like our Facebook page and follow us now on Twitter @chinamoneypod. In this episode of China Money Podcast, guest Bob Partridge, managing partner of transaction advisory services at Ernest & Young, explains why it is a good time for overseas institutional investors to invest in China's private equity right now, and what is in store for the industry next year. Listen to the full-interview in the audio podcast, watch the shortened video version, or read a transcript summary. Q: China's private equity industry is in a challenging position right now with a large capital overhang and difficult exit channels. Some are calling for an industry consolidation. What's your view? A: There are a lot of concerns going on in the public markets right now, and that's driving activities on both sides of the deal picture. On exits, there are certainly lower opportunities for private equity to exit. But on investing side, it creates better valuation opportunities. As a result, we are seeing a mixture of expected lower valuations, and the old problem that we always have in this market, that sellers always want to hold out as long as they can before they recognize changes in valuations. But overall, deal volume and fundraising are up, so it's not a bad time to invest in PE in China. Q: How has fundraising and deal volume been? A: In the first quarter, we had a good quarter. The second quarter, fundraising came down on concerns of what RMB funds really mean for the industry. In fact, last year, all the funds raised are unrealistic. The most recent quarter, deal volumes are up 9%. Because we see things before they become public, I can say deal pipelines are very strong. We predict that the third quarter will be up slightly because of the summer months. The fourth quarter, deal volume will continue to go up. Overall, total dollars deal volume will be up in 2012 year-on-year. Q: The somewhat strange phenomenon in the Chinese markets now is that valuations in the public markets are lower than private markets. What does that mean for investors? A: There is lots of insanity out here. It's easy to zero in on some high valuation deals. But a lot of things here aren't as transparent as New York or London. Entrepreneurs expect high valuations, when they hear a public deal getting done at 20-times multiple, for example, they think their company should be worth at least 21 times. So you have mixtures of exaggerated reporting and embellishment of what the real valuations are. But in general, we are seeing valuations are coming down on a historical perspective. Q: Exiting has been the most challenging part for private equity this year. Will M&A and secondaries really emerge as viable alternatives? A: If you look at seasoned international private equity investors, they all position their companies for a variety of exits. That's happening now in greater China. Private equity investors are not desperate to sell unless their fund life requires them to do so, which is not really the majority of the funds. Private equity here are buttoning down and trying to create value at their portfolio companies. They are looking at next year (for exits). So for the time being, they are thinking what can we do to close out 2012 as strongly as possible, clean up corporate governance, expand channels and improve profitability. Of course, that's also positioning the company for trade sales. Secondaries are developing. Clearly, it will increase this year and next year. Some of the secondaries that were done are long-time held investments where the GPs really have to close down and return to LPs. Q: There are lots of uncertainties now in China's macroeconomic outlook, and companies are more prudent on M&A. Will we really see more M&A deal? A: M&A will probably be soft compared to last year, as companies are staying more prudent. Next year, with Europe's situations improving, the U.S. elections over,
