China investors eye carve-out opportunities

While public-to-private transactions attract the most attention due to their size, the frequency of these deals has abated since the flurry of activity around US-listed Chinese companies in 2015. The number of buyouts involving China-based businesses reached 30 in 2012 and has held steady since then, averaging 32 a year. Overseas acquisitions featuring Chinese GPs, on the other hand, have risen from just three in 2012 to 17 last year, accounting for 40% of all China buyouts.

These transactions don’t necessarily result in a private equity investor taking outright control. The purchases of cancer care provider Icon Group and Real Pet Food last year – both of which are Australia-based companies with aspirations to grow in China – were made by consortiums in which Chinese GPs were participants. Pagoda Investment teamed up with QIC and Goldman Sachs on the former, while Hosen Capital worked with New Hope Group and Temasek Holdings on the latter.

Of the purely domestic transactions, founder motivation is the key factor: either they want to retire and have no successor, or they want to stay involved but accept that third-party capital and assistance is required to achieve scale. However, carve-outs are emerging as an attractive alternative deal-sourcing channel – and they often allow sizeable amounts of capital to be put to work.

“Previously you wouldn’t see anyone selling assets in China, especially multinationals because they wanted to invest in China. Now, with slowing growth and a tougher competitive environment, if it’s non-core and too small, they will consider selling it,” Jean Eric Salata, CEO of Baring Private Equity Asia, told the AVCJ Forum in November.

Baring teamed up with CITIC Capital to acquire English language training provider Wall Street English last year in a deal that was expected to deliver cash proceeds of around $300 million to existing owner Pearson. CITIC has worked on three more transactions in the last 15 months that have a similar profile. It secured deals for Ansell’s sexual health division, Euromoney Institutional Investor’s financial information database unit, and the McDonald’s business in mainland China and Hong Kong.

Each of these deals is a partnership with a financial or strategic investor. For example, CITIC Capital worked with a unit of CITIC Group and The Carlyle Group on the $2 billion McDonald’s carve-out. This followed a spin-out – as opposed to a full buyout – of the Yum Brands China unit into a separately listed entity backed by Primavera Capital Group, among others.

Asked about the appeal of carve-outs, Eric Xin, a senior managing director at CITIC Capital, said: “The management team is motivated, a lot of bureaucracy can be removed, and improvements can be made through localization. In addition, valuations are not totally price-driven, it is more attractive than buying from another PE firm. When a multinational is struggling with its China business, it wants a partner.”

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• Topics
• Greater China
• Buyouts
• China
• CITIC Capital
• Baring Private Equity Asia
• Hosen Capital
• Pagoda Investment
• GPs