GPs warn of 'China risk' in cross-border deals - AVCJ Forum

"Chinese strategic players generally lack international experience, and the cultural gap is so big," said Yichen Zhang, chairman and CEO of CITIC Capital, at the AVCJ Forum in Hong Kong. "You could probably count the number of true Chinese multinationals on one hand. There are a lot of failures among overseas acquisitions, so there are a lot of risks."

He noted that many international GPs want to work with Chinese strategic investors, seeing potential value they can bring, but partnerships rarely come to fruition because international investors' understanding of the deal dynamics is completely different from their Chinese counterparts.

"We've heard from our international partners a lot of complaints against other Chinese players - about their competitors coming in on deals, not being able to get deal flow, and not being able to get regulatory approval, and so on and so forth. Those are the types of risks," Zhang added.

China's largest privately-owned conglomerate Fosun International is aggressively looking to add overseas luxury brands to its portfolio. It bought buying a 35% stake in Italian luxury menswear manufacturer and retailer Caruso in September and has also invested in Greek jeweller Folli Follie Group and upscale US knitwear maker St. John Knits. It is also involved in a takover bid for France-based vacation resort operator Club Méditerranée.

James Zheng, managing director at Fosun Capital Group, stressed that it is crucial Chinese strategic investors understand the objective when doing outbound investment.

"Why do we invest in overseas projects? We don't want to take over the operations and we still respect the founders and second-largest shareholder. We're very clear what kind of value we can add - basically it is helping these guys to grow in the Chinese market. It isn't to help an American company based in America. We're very clear on that," said Zheng.

In this context, ownership structure is important. Zhang cited St. John Knits as an example: Fosun owns part of the overall group but holds a majority stake in the Chinese joint venture entity. When the China market grows to a certain extent, Fosun will exchange Chinese entity shares for parent group shares, paving the way to exit.

For overseas investors, choosing the right entrepreneur and ensuring a strong alignment of interest are among main considerations when looking to expand in China.

"If you're a minority investor, the chairman and the founder of the company can make you successful but also make you a failure. So I think the alignment of interest with the main sponsor of the group is very important," said Paul Yang, chairman of Taiwan-based CDIB Capital International Corporation.

Other frequently-stated China risks include corruption, corporate governance and exit. Addressing them properly involves paying close attention to contractual terms when negotiating with Chinese companies.

"We will make sure even for minority deals that we have the right to do a trade sale. This kind of measure guarantees that eventually we will get a satisfactory exit," said Zhen Gao, managing partner at Mandarin Capital Partners.

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• Topics
• Greater China
• China
• AVCJ Private Equity & Venture Forum
• AVCJ Events
• Outbound investment
• Fosun Group
• CITIC Capital
• Mandarin Capital Partners
• CDIB Capital