China GPs see window of opportunity to work with corporates on outbound M&A - M&A Forum

"A lot of the time, working with a strategic, at least in theory, makes a lot of sense," Thomas Lanyi, managing director at CDH Investments, told the China M&A Forum. "It allows you to win assets, but whether you're able to structure a partnership with a win-win outcome is a different matter." The reality is that GPs often spend more time discussing shareholder agreements with their Chinese partners than they do negotiating for the foreign assets.

There is a window of opportunity for private equity to work with Chinese corporates, given that many of these companies are first-time acquirers looking for advanced technology and industry expertise. They might be unfamiliar with overseas regulations and business environments, and so PE firms are effective cross-border partners because they can facilitate market entry. For some GPs targeting these situations, leading the investor consortium is preferable.

"I don't trust first-time strategic buyers to take control," said Eric Xin, senior managing director at CITIC Capital Partners. "If you want to make money, you have to lose some money. Especially for Chinese strategics doing outbound acquisitions for the first time, the chance of losing money is very high. If you're in the driving seat, you will be losing money with them. In that sense, we can work with strategics, but we take the lead and they're the minority."

Mei Tong, an executive director of Hopu Investment - and before that vice president of strategy and acquisitions at Walmart China - agreed that private equity can help Chinese corporates be more realistic in their approaches to outbound M&A. It is a similar scenario to when multinationals were looking to enter China, and not everyone has been successful.

"The lesson I have learned is you really have to be focused on what you're buying. The capabilities you're buying cannot, in my view, be represented by market share," she said. "We acquired a company with a 38% share of the personal care products market in 1994, but post-acquisition that share dropped to single digits. Why did we make that strategic mistake? Because the capability we acquired - the 38% market share - was driven by sales from distributors in the lower-tier cities. When a global company comes in and offers premium products, those are only suitable for first-tier urban markets."

While the private equity-corporate partnership strategy is relevant now, it is unlikely to be so in perpetuity. As Chinese companies become more experienced in overseas M&A, many are expected to hire investment professionals for captive corporate investment units, which means there will be less need for private equity. GPs must therefore re-consider how they can offer value in this context.

"[The corporates] know what they need and use intermediaries or agents like ourselves. That will gradually go away. The Chinese are learning so fast - their experience and confidence in M&A is growing every day. I don't see there being a long-term need for partnerships with private equity on that basis," explained Lanyi.

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• Topics
• Greater China
• Buyouts
• AVCJ Events
• China
• Outbound investment
• M&A
• Hopu Investment Management
• CITIC Capital
• CDH Investments Management