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Big Profits Revive Buy-Out Interest in China

China is attracting renewed interest from private equity groups after a series of highly profitable dealsthat have marked a sharp turnaround from the previous poor record for buy-out firms in the country.

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“For years there has been growth in China but it has been profitless growth,” Jonathan Zhu, co-head of Asia for Bain Capital in Hong Kong said. “But in recent years, we have seen growth with real profits.”

Carlyle Group is expected to make as much as $5 billion, or six to seven times its money, as it exits from its $750 million investment in China Pacific Life, which listed last December in a $3 billion initial offer in Hong Kong.

That deal will be one of the most profitable in the history of private equity and is likely to reap as much as $100 million for XD Yang, the head of Carlyle’s Asian buy-out group, depending on the share price in two years and the performance of other investments in his fund which has $2.5 billion under management.

Similarly, Shan Weijian, until recently a Hong Kong-based partner in TPG, will receive tens of millions of dollars for driving the investment in, and sale of, Shenzhen Development Bank – a deal that will net the buy-out firm and its investors more than $2 billion, or 10 times their money.

TPG might make even more from its stake in car dealership China Grand Auto, which is expected to raise at least a $1 billion when it lists in coming months. TPG bought the company as a joint venture with an entrepreneur in 2006 just as the demand for cars began to soar in China. People close to TPG said the firm expected to make between seven and eight times its cumulative investment of $250 million in the group, assuming the stock market does not fall sharply.

However, the competition for good China deals is about to intensify with a raft of new funds. Shan Weijian left TPG several weeks ago and is raising $1-2 billion for investment in China along with Pacific Alliance, another investment firm. Fred Hu, formerly a managing director at Goldman Sachs , plans to raise as much as $4 billion. Henry Cai, the UBS rainmaker in Hong Kong, has just left the bank and plans to set up a private equity fund.

Bain Capital plans a new $2-2.5 billion fund for Asia, primarily focusing on China, according to people familiar with the matter.

The flood of capital may result in new problems. “A lot of capital will be misallocated,” said one dealmaker.