Flights of fancy

Last month, Zhongnan Heavy announced it plans to buy Datang Brilliant Media, a TV content producer. It has also teamed up with ZEG Capital, an investment arm of property developer China Zhongzhi Enterprise Group, to raise up to RMB3 billion ($483 million) for a media-focused buyout fund. Zhongnan heavy and its parent will contribute RMB240 million between them.

They envisage the fund as an industry consolidation platform that will invest across TV production, internet media, advertising, entertainment programs and online gaming. The GP will have the option of selling portfolio companies to Zhongnan Heavy.

Zhongnan Heavy is not an isolated case. Dozens of Chinese corporations are looking to get into private equity as part of efforts to satisfy their appetite for M&A.

A strategy that was once the exclusive reserve of technology giants and their corporate venture capital units now stretches across multiple sectors. Just in the last month, Shenzhen-listed Aier Eye Hospital Group has committed to two funds with a view to driving consolidation within the ophthalmology industry.

There are all kinds of ways in: a corporate might absorb an entire private equity investment team and run it as a captive unit; or it could simply go into partnership with a manager, learning about deal sourcing and execution but without incurring heavy set-up costs.

One struggles not to be cynical when hearing of plans devised by the likes of Zhongnan Heavy. Does this company have more money than sense? It is making a giant leap into unfamiliar territory, supposedly as part of a wider business diversification initiative.

Corporate participation in private equity, as the tech sector has proved time and again, is most effective when there is a clear link between the investment strategy and the company's core business. The VC unit supports new technologies, assessing whether if pushed in certain directions they can be of benefit to the parent. This is business development, not flight of fancy.

If Aier Eye Hospital, for example, is an active LP in the funds it has backed and goes away with an understanding of M&A that can be put to good use when making parallel acquisitions on its own, then the exercise will have been worthwhile. The same might be said of Suning Commerce, an offline electronics retailer that is aggressively developing an online business.

However, where there is little strategic alignment between company and fund, there is no compelling incentive to persevere with the project. Asian corporates, often assisted by a low cost of capital, expand and contract in accordance with the prevailing economic climate: they enter new industries when it is cheap and easy to do so, and then shed non-core assets when conditions worsen.

The ultimate beneficiaries of corporates meandering haphazardly into private equity might be secondary investors. Asia's secondaries market is increasingly active, with restructurings and direct acquisitions of portfolios featuring prominently. The sellers are not necessarily conventional LPs and GPs. A corporate under pressure to divest assets might be far more incentivized to get a deal done, whether it is jettisoning a few assets or an entire portfolio with manager attached.

Look out for more secondary deal flow emanating from Chinese corporates a few years from now. It may or may not include interests held by Zhongnan Heavy.

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• Topics
• Greater China
• Secondaries
• Buyouts
• China
• Secondaries
• buyout