Chinese buyout frenzy

Outbound private equity investments from China into North America and Europe have been growing rapidly.


According to the investment bank Houlihan Lokey, in H1 of 2012, the outbound Chinese private equity transaction value was US$219M. Since then, Chinese private equity firms have drastically increased their offshore spending and recorded total transaction value of US$5,8B and US$7.4B in the first half of 2015 and 2016 respetively. While in 2012 and 2013, the rest of Asia played a more dominant role in outbound investments in terms transaction value, since 2014, China has been carrying the torch. In H1 of 2016, Chinese buyout funds and venture capital firms invested almost six times as much on foreign targets compared to the rest of China.

Chinese private equity funds did not only up the ante in transaction value but also did not shy away from large buyouts particularly in the healthcare and technology sector. Chinese private equity firms participated in the US$3.6B takeover of US printer Lexmark International, the US$2.75B purchase of Dutch chipmaker NXP Semiconductors’ standard products unit, as well as the US$600M acquisition of Norway-based Opera Software’s web browser business.

Drivers of Chinese outbound investments

The drivers behind the rapid expansion of Chinese outbound acquisitions go well beyond the standard strategy of bringing Western brands and technology to the Chinese domestic market. Chinese private equity, backed by state-owned enterprises, privately owned businesses, and high net worth individuals, have accumulated a significant amount of dry powder. According to Prequin, in June 2015, Chinese private equity had US$125B of assets under management out of which US$38B was cash available for acquistions. With declining GDP growth and a very competive market in China with relatively high valuations for quality assets, outbound investments represent a currency hedge as well as an opportunity to diversify the portfolio.

In particular, the relative domestic high valuations have been creating an opportunity for “listing arbitrage”, a strategy by which Chinese funds take companies listed on foreign exchanges private only to relist them domestically. Examples of this strategy include Focus Media’s going-private transaction from NASDAQ by a group of Chinese and global private equity firms at a valuation of US$3.7bn in 2015 and its subsequent re-listing on the Shanghai A-share market at a valuation of US$6.3bn in 2016.

In tandem with increased buyout presence in the West, Chinese private equity funds have become very sophisticated and nimble at completing transactions. They often partner with strategic buyers and add value by providing financing, expertise, risk exposure, and entry to the Chinese market. Peter Fuhrman, the chairman and CEO of China First Capital, a Shenzhen-based investment banking and advisory firm, said: “It’s about buying companies that, once they have Chinese owners, can start making really big money selling products in China”.

Rise not without challenges

Despite the graduation of Chinese private equity into the global buyout market, Chinese fund managers are facing some challenges ahead. For example, the Committee on Foreign Investment in the United States recently blocked GO Scale Capital’s acquistion of Philip’s LED lighting component, Lumileds, due to suppy chain concerns. According to Jeffrey Wilson, Director at Houlihan Lokey, private equity funds also have to overcome cultural challenges in developed markets, as businesses are often unwilling to cede control outside their own borders.

Investment in Canada

Chinese private equity funds do not only invest in the US but also look for yield north of the border. For example, Chinese food processor and distributor Xiwang Foodstuffs partnered with investment firm Primavera in the US$730m acquisition of Iovate Health, a Canadian nutrition supplement maker. In particular, Canadian companies in the mining and oil & gas sector with strong assets but depressed topline due to the faible commodities market could be a suitable target.

The author would like to thank Hugo Margoc, Articling Student, for his assistance in preparing this legal update.

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