China buyouts depend on industry, company expertise - AVCJ Forum

“The Chinese economy hasn’t seen growth this slow since before the implementation of the reform and opening up policy in the 1980s. Many industries are under pressure to deal with issues like overcapacity and weaker financial performance,” Yi Luo, partner and head of China at CVC Capital Partners, told the AVCJ China Forum. “In such an environment, a control buyout strategy can help improve a company’s efficiency.”

However, he added that a deep understanding of the target industry – and a company’s long-term role in that industry – is essential to achieving greater efficiency. CVC addresses this by having its operating partners work with the deal team during due diligence. They produce an operational evaluation report that is considered by the investment committee when deciding whether or not to proceed with a transaction.

While private equity firms may seek to play an active role over the course of the investment, they must ultimately rely on management to drive value creation, and improvements at team level can also be planned for. “We will still keep part of the core management teams if they demonstrate strong capabilities and share our vision, but in most cases we change the CEO,” said Feng Zhai, managing director and head of the portfolio management team at CITIC Private Equity.

In one instance, CITIC PE went through two CEOs in two years as the objectives for the business changed. At first, the GP wanted someone who could manage change, putting a new framework in place and establishing corporate culture. Then the focus switched to boosting sales and taking the company to the next level, so a different skill set – and a different person – were required.

Fusing new and existing management teams is not easy. CDH Investments has completed approximately 10 buyouts in China and one of the first questions asked when assessing an investment is whether the current leadership of a company is strong enough.

“I have seen situations where people with brilliant backgrounds have been hired as CEO of PE-controlled companies. After a while, many mid-level managers leave. As a company gets larger, mid-level managers become the core and if they find out the new CEO is earning 10-20 times more than them and doing nothing special, they are upset. It is important for a GP to understand a company’s culture and structure before making changes to the management team,” said Xiaoling Hu, a founding partner at CDH. 

For more information on the AVCJ China Forum, go to www.avcjchina.com.

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