The rise of private equity (PE) in global investment has been both undeniable and impressive. Despite the economic downturn, Bain & Company note that in 2022 the industry successfully raised $1.3tn, underscoring PE’s resilience against formidable economic challenges such as inflation and volatile interest rates. Over the past half-decade, PE has raised a staggering $6.4tn, reflecting the industry’s burgeoning significance. As the global economy braces for further challenges, it is evident that these firms are enhancing their portfolios’ value, optimising margins and fuelling revenue growth. 

Yet the FT’s recent revelation that Goldman Sachs acquired UK and US firms operating in sensitive sectors using a China-backed PE fund highlights the industry’s complex regulatory environment. It demonstrates both PE’s ambitious strides and potential pitfalls.

While the US offers a relatively settled legal framework for PE investments, navigating international waters — especially in markets such as China — is more complex. China’s regulatory environment, particularly concerning the internet and finance sectors, poses considerable challenges. With the Chinese government’s evolving stance on foreign investment, PE firms must have an in-depth understanding of local regulatory nuances.

In addition to securing investments, aligning stakeholders’ diverse interests remains pivotal. PE firms, with their primary objective of amplifying a company’s value, may sometimes implement cost-cutting measures, potentially leading to job losses. This can create tension with employees and other stakeholders, underlining the need for balanced decision making that considers both long-term growth and stakeholder welfare.

Despite these challenges, PE’s agility remains unparalleled. Its ability to swiftly respond to market changes, seize new opportunities and divest underperforming assets is a unique advantage. Moreover, its contributions extend beyond financial investment. PE offers invaluable expertise, strategic guidance and vast networks, aiding the growth and sustainability of their portfolio companies.

Lessons from Goldman

The recent episode involving Goldman Sachs and its China-backed investments illuminates the complexities facing PE. Beyond revealing the industry’s vast aspirations, the incident stresses the criticality of a deep-seated understanding of global geopolitics and an unwavering allegiance to ethical investing.

From these events, we gain crucial lessons that call for immediate action. Foremost, regulators ought to champion the cause of enhanced due diligence, compelling PE firms to delve deeper, particularly when the stakes involve sensitive sectors or geographies. This not only encompasses transactional intricacies, but also the broader, possibly far-reaching, global implications. Moreover, the imperative for clearer regulatory parameters cannot be overstated. It is high time that governing bodies introduced refined, lucid, and, where feasible, harmonised guidelines for transnational investments.

Further, as geopolitics become more convoluted, there is an evident need for PE firms to infuse geopolitical risk assessments and education into their investment calculus. This is not a luxury, but a requirement. Lastly, the need for ethical oversight is clear. That requires either an international regulatory group or framework that establishes new standards, or harnessing existing infrastructure that ensures investments not only align with commercial aspirations, but also resonate with universally upheld benchmarks.

PE’s resilience indicates its capability to adeptly manoeuvre through economic and geopolitical oscillations, with a clear focus on internal value enhancement. Yet the guidance above is more than just a recommendation; they are imperative protocols. By embracing these carefully considered measures, the path forward for international private equity investments can be charted with both stability and a broader societal benefit in view. 

Julien Chaisse is professor of law at City University of Hong Kong and president of the Asia-Pacific FDI Network.

X: @jchaisse

This article first appeared in the December 2023/January 2024 print edition of fDi Intelligence

Do you want more FDI stories delivered directly to your inbox? Subscribe to our newsletters.