PE firms well placed for China cross-border deals - AVCJ Forum

While Chinese companies previously focused on large-cap overseas targets, there is now most demand for mid-cap opportunities. The amount of capital available in the country, particularly to listed companies, is a major factor in enabling these deals.

"One of the things about the capital market in China is that the valuations are rich and have been high for many years, and we foresee that distribution continuing in the years to come. So given that, you have a huge arbitrage opportunity in certain sectors," said David Han, co-founder and CEO of Yao Capital. "That's the reason why over the last two years there was a big wave of go-privates for Chinese companies listed on US markets."

Private equity investors can be significant contributors to these strategic plays, particularly those with experience on the post-acquisition side, which is still lacking among Chinese strategic buyers. The gap is so significant that GPs can have a major impact even as minority investors alongside corporate investors.

GPs see their role as particularly important in helping strategic buyers develop the proper approach to managing their acquisitions long-term. Integrating a newly purchased company requires considerable prior planning, particularly for one based in a different market, than making a purchase with an eye solely to taking advantage of arbitrage and flipping it as quickly as possible.

"If you're more fundamentally focused, the mentality is no different than in the European or US markets," said Boon Chew, senior managing director of CITIC Capital. "You have to start thinking about post-investment management right away, and that means you're going to start thinking about strategy, you're going to start thinking about people, you're going to start thinking about alignment."

Though recent political upheavals in Western markets, particularly the US election and the UK vote to leave the EU, have caused concerns over long-term instability, participants say this is more pronounced among Western investors than Asian players. While investors are likely to hold back in the short term, in the long run their decisions will be based more on issues closer to home.

"Chinese investors are a bit less concerned about the uncertainty in these markets. They're really looking to target the growing Chinese domestic market," said Lin Feng, founder and CEO of advisory firm Dealglobe.

He added that in many cases the Chinese companies that Dealglobe advises on cross-border acquisitions see these deals as a requirement in order to adapt to a changing domestic market rather than an option. Therefore they are less likely to be deterred by temporary uncertainty from making deals they consider to be necessary for the long term.

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