Crouching tigers, hidden dragons: Private equity fund selection in China

We examine the investing behavior of investors in Private Equity (PE) funds in the Chinese market including choice of fund, commitment amount and performance. The Chinese PE market is characterized by information asymmetries, an uncertain regulatory environment, cultural and legal difficulties involved in executing transactions and differing investor risk appetites. The results suggest that foreign investors seek manager and fund characteristics that lessen information asymmetry We find that they are more likely to invest with firms that are more experienced and not government-affiliated. Foreigners are also more likely to invest in larger funds. We show that the size of an investor's commitment amount is determined by fund characteristics such as size, sequence, and stage. In terms of performance, we find some evidence indicating that domestic investor-backed PE funds exit a greater number of companies, and that their exited investments deliver higher returns relative to exits executed by PE funds supported by foreign investors.