GPs eye carve-outs from Chinese SOEs

SOEs, which account for roughly one-third of the economy and dominate key industrial sectors, have long received preferential support from central and local governments, including favorable financing terms. Now, though, these companies are being urged to restructure as part of deleveraging efforts. At the same time, China has come under pressure from the US and other countries to create a level playing field for foreign and domestic businesses.

“[SOEs] could sell buildings and in some cases their subsidiaries or stakes in overseas companies. Who could then be the buyers? PE firms will have a big part to play,” Boon Chew, a managing partner at CITIC Capital Partners said. His firm has done seven SOE deals, six of them buyouts. They include the acquisition - with FountainVest Partners - of a majority stake in China Merchants Loscam, a pallet-leasing business under Sinotrans, which is a Hong Kong-listed unit of SOE China Merchants Group. The divestment was the result a decision to focus on core business areas.

“There has traditionally been less focus on the SOEs from private equity firms as these companies are not the most well known for having high growth rates. It is also difficult to choose which management team at the companies to bet on as the conditions could always change quickly,” said Chew.

Despite these potential opportunities, investors must recognize that SOE deals - which represent a longstanding but largely unrealized target for private equity - are often more complex than those involving private companies and require careful planning. Every situation has its own set of characteristics and stakeholder agendas, which must be taken into consideration.

“SOEs have their own decision-making processes and own dynamics, and PE investors must examine whether they are familiar and comfortable with that. They have to figure out their ultimate exit route, their approaches for post-investment management, and measures to make sure they have an alignment of interest with these companies,” said David Wong, a partner at PAG Asia Capital.

This view was echoed by Patrick Zhong, founding managing partner at M31 Capital, who identified the different objectives of investors and SOEs as one of the biggest challenges. “A good deal requires an alignment of interests of [all interested parties]. The difficult part for investors going into these businesses is that the managers could have very different motivations to them, which could make the deal difficult to put together,” said Zhong.

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• Topics
• Greater China
• Buyouts
• China
• HKVCA
• PAG
• CITIC Capital Partners