Talent shortages, financing issues hinder China buyouts

"There are two main focuses for the buyout deals. One is what is your operational angle? Can you bring something from your platforms, network, portfolios and prior experiences?" said Edward Huang, senior managing partner at The Blackstone Group. "The second thing is, 'Are the financing markets mature enough?' If the banks understand M&A products the better, that could create better financing opportunities."

Huang, who was speaking the Hong Kong Venture Capital & Private Equity Association's (HKVCA) Asia forum, added that there are plenty of opportunities for buyouts despite these obstacles.

Martin Mok, a partner with EQT Partners, noted that transaction value has grown from $100-200 million in 2006, when the firm completed the first buyout in China, to $6 billion over the last two years. If take-private deals are excluded, there have been 15-20 buyouts worth $1.5 billion. The primary sources of these deals are succession planning and corporate spin-offs.

However, the question remains as to whether this activity - which accounts for about 10% of the entire private equity market in China - is sufficient to justify a buyout-dedicated fund.

"It depends on the size of your fund. If you're a very large fund, doing buyout deals in one place, obviously it would be crowded. But in general, given that you have 10% of the market, you can deploy $150-200 million in mainland China alone easily over four years," Mok said.

In many cases, the founder stays on as chairman post-buyout and works alongside the management team. EQT usually structures the business as a joint venture with the founder in addition to making cash payments. "Otherwise, why should they work with you?" Mok said.

When dealing with a founder who has a strong personality, EQT may walk away from an investment because it would be difficult to push through management changes in the event of corporate governance concerns. By contrast, in succession planning situations, founders are often more willing to work with new CEOs.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Buyouts
• China
• buyout
• The Blackstone Group
• EQT Partners