GPs need industry networks to source China buyouts - AVCJ Forum

The principal drivers behind the greater availability of control deals are unchanged: first-generation entrepreneur nearing retirement, slower economic growth creating tougher operating conditions, and multinationals retreating from China. However, the volume of opportunities is growing.

"In the past, nobody was selling. But this year, I have seen a structural change due to a slowdown in China’s economy. Now we are finally seeing more sizable businesses put up for sale,” said Eric Xin, a senior managing director at CITIC Capital.

CITIC has participated in several multinational carve-outs including the McDonald's mainland China and Hong Kong business, Wall Street English from Pearson, and a data division from Euromoney. There are macro reasons behind these sales - such as capital controls and renminbi depreciation - but also a string of local considerations, from rising competition to difficulties keeping pace with a fast-changing, and digitizing, market.

Xin noted that multinationals “want to leave China on good terms”, and so often prioritize finding good partners over getting the best price. There is also a lot of low-hanging fruit in terms of operational improvement - once the proper structures and management incentives are put in place, a business can be reinvigorated relatively easily. Investors now expect more Chinese conglomerates to follow their international peers in selling assets, largely driven by government deleveraging efforts.

Echoing this observation, Tony Jiang, co-founder and partner at tourism-focused GP Ocean Link, said that a lot of attractive companies that previously rejected his advances have been willing to talk. “Valuations have come down quite a bit and the operating environment for entrepreneurs has become more complicated due to factors such as slower economic growth and declining consumer confidence. It has become easier to negotiate a good price,” said Jiang.

A weakening A-share market and closer regulatory scrutiny of listing candidates have also contributed to entrepreneur willingness to sell, but the reality is that motivations vary hugely. While age has been a factor in many buyouts completed by Lunar, a mid-market consumer specialist, disputes between founders, divorces, and religion have come into play as well. The key is leveraging industry connections to source deals.

“When we hear from some of our portfolio company managers that such and such business is not doing so well and the founders are going through a divorce, we will approach that company as an industry friend, and ask them, 'Hey, how are things going?’ In the past several years, almost all our deals have come through these channels,” said Derek Sulger, a partner at Lunar.

Founders generally have many concerns when selling their companies, and a smart GP should focus on persuading them that their legacy will be preserved even as the business is improved. In many cases, founders retain a minority stake to enjoy some of the future upside, Sulger added.

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• Topics
• Greater China
• Consumer
• Buyouts
• China
• CITIC Capital
• Lunar Capital Management
• Ocean Link
• buyout