GPs, corporates should enter outbound deals with eyes open - China M&A Forum

“Our interests won’t be completely aligned with those of strategic investors from the beginning. As a financial investor, our fund life is 10-12 years. For a strategic, their interest is in building a Fortune 500 or Fortune 100 company, so they have a much longer investment horizon,” said Steven Wang, managing director and head of the pharmaceutical investment team at CITIC Private Equity.

Establishing an exit mechanism on entry is one way of addressing this issue. For example, a private equity firm might push for downside protection, ensuring it gets back its principal if a strategic buyer fails to achieve certain goals after acquiring an asset overseas.

Last month, CITIC PE teamed up with 3SBio – a Chinese biotech company it took private in the US in 2013 and relisted in Hong Kong two years later – to buy the contract development and manufacturing business of Canada’s Therapure Biopharma. The GP took a 49% interest in the acquisition vehicle and was granted a put option under which it can sell all or part of that stake to 3SBio after four years.

“We wouldn’t go into a deal without thinking about the exit,” said Wang. “However, it’s much more important to have a strategic value creation plan. Once the value has been created, there are many exit options. You can’t come into a deal only with the intent to get your principal capital back eventually – that is the worst approach when working with a strategic investor.”

PE value creation can be relevant from due diligence through post-investment integration. Where a Chinese corporate pays little attention to expanding beyond its core verticals, for example, a private equity partner can help source targets. Last year, Primavera Capital brought Ant Financial – Alibaba’s financial services affiliate – into the spin-off of Yum Brands’ China business with a view to integrating its online payment services with the traditional catering industry.

“Alibaba has a leading position in e-commerce as well as online payment solutions. But sometimes their investment department won’t really think much about how to use investment as a tool to create new businesses for the group, such as in the payment area. We can get Yum China – which wants to accelerate its growth by using advanced technology – and Ant Financial to work together,” said Max Chen, a managing director and founding member at Primavera.

Meanwhile, state-owned enterprises tend to be among the most inexperienced overseas acquirers, so private equity firms can provide the expertise required to close a deal in a professional and timely manner. When PAG Asia Capital supported Apex Technology in the purchase of US-based printing technology and enterprise software company Lexmark International last year, speed of execution turned out to be crucial.

"We have a lot of experience because our professionals come from international firms," said David He, a partner and head of operations at PAG. “For this deal, we got our leverage onshore. Just one week before the Chinese government introduced its capital outflows policy, we managed to convert more than RMB10 billion ($1.5 billion) into offshore currency to finance the deal.”

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• Topics
• Greater China
• Buyouts
• China
• Outbound investment
• PAG
• Citic Private Equity
• Primavera
• M&A