European GPs seek exits to Asian corporates

During a visit to Beijing in 2010, British private equity luminary Guy Hands said he saw China dominating the global economy for the next 20-50 years. His buyout house Terra Firma, he added, would seek Chinese partners for existing portfolio companies rather than look for direct investment openings into the market.

True to Hands' word, since Terra Firma marked its foray into Asia with the opening of a representative office in Beijing last August, the investor has focused its attentions on portfolio management rather than fund investments.

But Terra Firma's business development focus in Asia is far from unique among European GPs. In 2009, fellow buyout firm Cinven opened an office in Hong Kong to support its European portfolio companies expanding into the region and the following year Investindustrial set up shop in Shanghai. It hired operational expert Warren Liu as office head, a clear indication of its focus.

Bridgepoint and Advent International are also said to be planning to introduce portfolio teams in Asia. The former has appointed Henry W.K. Chow, ex-head of IBM Greater China, to help identify opportunities for its European portfolio companies.

For Cinven and Investindustrial, their present strategy is one they intend to stick to for the foreseeable future. "What we're doing now is not a front for an ultimate goal of becoming a direct investor here in Asia. We genuinely believe our model is the right one," insists Joseph Wan, a Hong Kong-based operating partner with Cinven.

Sticking to the knitting

Ostensibly, at least, what these buyout firms are doing is attempting to carve out a slice of the Asian growth story without jeopardizing returns by attempting to do buyouts. The lack of opportunities in this sphere shows no signs of improving any time soon, with the overall value of buyouts for the first quarter of 2012 coming to $4.6 billion - the lowest amount in a year. Even Terra Firma, which ultimately hopes to find investment opportunities in China, has been deterred so far by the size and structure of the deals available.

"Our deal size is EUR300-500 million, and we want some sort of control - majority ownership or significant board representation, but large control deals are difficult to come by in China," says Bo Shi, head of the firm's China office. "A lot of companies in China are also partially or fully state-owned, which makes it more difficult, and others are run by first-generation entrepreneurs."

Another reason why European firms may be favoring bolt-on acquisitions is due to the favorable attitude many Chinese companies have towards their European counterparts.

According to Ivan Gwok, principal at Cinven, the admiration displayed by many Chinese targets makes doing bolt-on acquisitions much easier than fund investments. "You're simply better received as an M&A player from Europe," he says. "Many of them want to learn how to build a successful brand in Europe, especially given the current climate."

Exit drought

In reality, though, the influx of European portfolio teams to China and Hong Kong may have more to do with the state of the exit environment in Europe than the lack of buyout opportunities in Asia.

"Many European companies are cash starved at the moment and we do not see a lot of them coming to Asia to acquire - more to look for potential acquirers of themselves. Many of these are indeed PE-backed as an exit in Europe is now challenging," points out Maurice Hoo, who helps European funds set up operations for their portfolio companies in China on behalf of law firm Orrick.

Indeed, a number of European private equity firms have had some success exiting portfolio companies to Asian companies. This week mid-market player CapVest sold United Coffee, one of Europe's largest coffee companies, to Japan's UCC Holdings for EUR500 million. It is also no coincidence that Investindustrial has sold Italmatch Chemicals at a 3.6x return multiple to a Chinese investor and offloaded Italian architectural and engineering business Permasteelisa to Japanese construction conglomerate for a 73% IRR since its launch in Asia two years ago.

Exits to trade buyers are inevitably much harder to come by without prior expansion of the company within the local market. "Without [the investee company] being present at all in China it becomes very difficult, because then they have to do the whole market penetration themselves," says Carl Nauckhoff, principal at Investindustrial. "We had to show that there's real market penetration in Asia."

In some cases, a joint venture partner can actually turn into the future acquirer of the company. While many European companies' initial focus is to establish a sourcing or distribution point in Asia rather than scout for M&A opportunities, many of them need local partners to do this - but the local partners are not interested in doing pure distribution deals. "They end up forming some joint ventures so that the local partner has the opportunity to share in the upside or even take control some day - and those are M&A opportunities down the road," says Orrick's Hoo.

A European firm might enter Asia with a view to expanding the footprint for its products and services, but ultimately end up facilitating their Asian counterparts' entry into Europe as well - or instead.

Checks and balances

This need for portfolio companies to show Asian market penetration has even led several European portfolio teams to conduct due diligence in Asia on potential European targets. Before Cinven acquired lighting provider SLV-Group last year, for example, the GP's Asian team looked into SLV's market position in China in an attempt to gauge local perceptions of the company. Cinven also catalogued SLV's suppliers in the country, using the information to convince themselves that the business' growth and supply chain was sustainable in this market.

Indeed, without a private equity backer's involvement, it appears the dream of many European company managers of expanding into China is unlikely to become a reality. As so many Chinese organizations are controlled by the state, from airlines to agriculture firms, foreign companies often need to establish contact with high-ranking government officials in order to get a foot in the door.

Aside from the language difficulties, the cost of making regular trips to China from Europe in order to establish these relationships is too prohibitive for most European firms to bear - which is where a PE firm with an on-the-ground presence and local expertise can be invaluable.

Another area in which the European GP can add value to the process is by motivating companies to consider the expansion opportunities available to them in the region. "Many of the businesses we buy into say they're comfortable at the local business level," says Terra Firma's Shi. "We can therefore bring a China perspective to many of them who might never have thought about it before they were bought by us."

From European private equity firms' point of view, what will continue to distinguish them over the coming years is the quality of the returns generated by their exits. Having a rich set of contacts and an established market for their portfolio companies certainly won't hurt when it comes to accessing the trade buyer - their preferred exit route in the region.

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• Topics
• Europe
• Exits
• Greater China
• Europe
• Exit
• Asia
• Trade sale
• Cinven
• Terra Firma
• Investindustrial