Chinese firms say red tape hinders M&A in Europe – survey

Difficulties with residence and work permits, labor legislation in different markets, and tax issues are the most frequently cited non-regulatory barriers to investing in the EU. On the regulatory side, government approvals at local level and implementation inconsistencies between EU law and national-level law feature prominently.

Concerns were also expressed about cultural differences in Western and Chinese management styles, personnel costs and currency risk. Survey respondents said that business conditions for Chinese companies in the EU were less favorable than those in Africa, the Middle East and Latin America. However, the region ranked higher than North America in this respect.

Chinese outbound direct investment (ODI) from the country has increased steadily over the last decade, amounting to $65 billion in 2011. The government expects ODI to grow at a rate of 17% per year over the course of the 12th Five-Year Plan period (2011-2015), reaching $150 billion. Chinese ODI into Europe came to EUR3.2 billion ($4.4 billion) in 2011, but this figure doesn't include the large amount of capital routed through Hong Kong to other destinations.

Technology is at the heart of many outbound M&A initiatives as China shifts from a volume to a value approach, swapping out labor-intensive production for businesses based on intellectual property and industrial know-how. According to PricewaterhouseCoopers, high-technology was the most popular target for ODI in the first half of 2012 with transactions worth $13.2 billion, compared to only $6.7 billion in the same period a year ago.

European high-end manufacturing assets have proved particularly popular. Last January, Sany Heavy Industry acquired German high-tech concrete pumps manufacturer Putzmeister for EUR360 million, with CITIC Private Equity taking a 10% stake after helping broker the transaction. The deal came three years after Sany's state-owned rival Zoomlion bought Compagnia Italiana Forme Acciaio (CIFA) in 2008, backed by Hony Capital, Goldman Sachs and Mandarin Capital Partners.

Weichai Group, a Chinese automotive equipment manufacturer owned by Shandong Heavy Industry, has also been busy. In the past 12 months, the state-owned enterprise (SOE) has acquired Italian luxury-yacht maker Ferretti and made a sizeable investment in Kion Group, the German forklift truckmaker backed by KKR and Goldman Sachs. The latter transaction was valued at EUR738 million, making it the largest Chinese direct investment in Germany to date.

Sensing the opportunity, Sino-European private equity firm Mandarin Capital Partners decided to devote the entire corpus of its second cross-border fund to investments in advanced manufacturing and services companies across China and German-speaking parts of Europe. The vehicle is expected to reach a final close of EUR1 billion in the second half of 2013.

Of the two purported roles for private equity in these transactions - seller or partner and facilitator - the former is generally seen to have more potential. Chinese corporates must go through extensive approval processes for outbound investments and often end up overpaying for assets.

"From a PE perspective, the best way for outbound investments is to do stand-alone deals and sell them to Chinese buyers," Alberto Forchielli, Mandarin Capital's founding partner, told AVCJ last month. "One cannot gain much from aligning oneself with the Chinese companies, which often pay a premium of 30-40% and lose a lot of speed in terms of deal execution."

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• Topics
• Europe
• Regulation
• Greater China
• Buyouts
• Exits
• Europe
• buyout
• Exit
• China
• Outbound investment
• Mandarin Capital Partners
• Citic Private Equity