China seeing more liquidity, increased competition for deals - AVCJ Forum

A number of markets globally have seen currency appreciation, falling oil prices and negative interest rates for certain instruments, and this has helped drive up public market valuations, noted Kyle Shaw, founder and managing director at Shaw Kwei & Partners. This in turn filters through to the private markets.

"Sellers are looking at the public markets and think they should get high valuations," Shaw said, citing the 150% one-year gain in the Shanghai Composite Index. "The challenge for private equity is how do you put more money to work. We can increase leverage but we can also think about how when we buy a business we can make it a better business."

These strategies should be assessed in the context of a more advanced pool of target companies. "You can see management and founders are much more mature than a few years ago. They know how to talk to investors and they know what they need," said Mary Ma, co-founding partner at Boyu Capital. "They know whose money they need based on the value-added services they provide."

She has also seen a deepening in operational talent pool as executives become available who have experience working with multinationals, although the cost of hiring such individuals is rising. Shaw agreed there has been an improvement in the quality of senior and middle management in the domestic and expatriate workforces. He observed that "sometimes European managers are less expensive than their Chinese counterparts."

This operational expertise is expected to be brought to bear as buyouts become more available in China, driven not only by succession planning opportunities, but also by the impact of slowing economic growth as entrepreneurs appreciate that they need external support for their businesses to remain sustainable.

However, not all of these factors are guaranteed to deliver situations in which there is a change in control. Julian Wolhardt, China regional leader at KKR, and Boyu's Ma both stressed the continued importance of influencing businesses as a minority investor.

"You sit in the back seat, not the driver's seat," Ma said. "Before the investment committee takes the decision to make an investment you have to judge whether you are on the same page as management and the founder. Otherwise a minority position will be a weaker position, even if you have the ability to make operations stronger."

Wolhardt added that, in this context, it can be difficult to impose US and European value creation models on China. "You have to spend a lot of time managing relationships," he said. " We are very focused on that."

The AVCJ China Forum runs May 28-29 in Beijing. For more information, go to www.avcjchina.com

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• Topics
• Greater China
• Expansion
• Buyouts
• Exits
• China
• buyout
• Growth capital
• Exit
• Boyu Capital
• KKR
• Shaw Kwei & Partners