Fund focus: CITIC Capital eyes divestment opportunity

Two of the three buyouts CITIC Capital has made from its latest China fund – which recently closed at $2.8 billion – are carve-outs from Chinese conglomerates. The purchase of a majority stake in Loscam, a pallet and packaging business controlled by China Merchants Group, last December was followed in April by the purchase of UCO Cosmetics, a digital marketing and e-commerce services provider, from Shenzhen-listed Qingdao KingKing Applied Chemistry.

They break a streak of carve-outs from foreign multinationals over the past two years that saw divisions of McDonald's, Pearson, Ansell, Euromoney Institutional Investor and Ajinomoto all come under CITIC's control. However, Boon Chew, a managing partner with the firm, observes that these deals were the exception rather than the rule: Carve-outs make up over half of CITIC's historic deal flow and state-owned enterprises used to be the main sellers.

He expects more assets to come loose from both sources. "Liquidity is tighter in China today than in the past. When you look at carve-outs globally, companies spin out subsidiaries because they are non-core or because they want that liquidity," Chew explains. "This is one of the reasons why the number of buyout opportunities has grown so dramatically in the last five or six years."

Bigger is better?

Expectations of a surge in deal flow are the justification for CITIC's substantial step-up in fund size. According to AVCJ Research's records, CITIC Capital China Partners IV is the fourth-largest US dollar-denominated China fund ever raised. It's predecessor, which closed in 2017, was $1.6 billion. That vehicle, which closed in 2017, marked the first time the firm crossed the $1 billion threshold. It also brought together CITIC's China and international teams, which had previously operated separate funds. 

Responsibility for deployment falls to approximately 40 investment professionals, most of whom are based in Beijing and Shanghai with a small team in New York. They are divided across six verticals – consumer products, business services, consumer services, healthcare, technology, media and telecom (TMT), and industrial – and supported by 20 operations executives. Some are sector-focused professionals and others have functional expertise in areas like HR and supply chains.

The set-up isn't so different from that of any buyout shop in the US or Europe, and Chew observes the fundamentals of investment are the same. "What we bring to the table are strategy, people and alignment," he says. "We must go in with a clear idea of what we want to do with a business. We must ensure we have the right people in place to execute against it and we surround them with the right resources. And there must be incentives for management to do what we want with a business."

There is even evidence of roll-ups – a staple of developed buyout markets – emerging in China. In the past couple of years, CITIC has acquired CIBTvisas, a visa processing company, and Sky Facility Management, a facility management services provider. Both are intended to serve as platforms to drive consolidation in China's fragmented business services space.

Changing dynamics

The country differs from other markets, predictably, in terms of culture. Marketing, for example, is dictated by local ecosystems, which makes operating without an on-the-ground presence difficult. Being able to relate to and communicate with local management teams is another key skill, especially given China's middle management talent pool is relatively shallow. CITIC seldom looks to make immediate leadership changes; the preference is to work with incumbents wherever possible.

This talent shortage extends to private equity firms themselves. "In the US and Europe, experienced buyout professionals are easy to find. That's not the case in China, where the buyout market is relatively young," Chew says. "If you look at our deal leads, we've trained them all ourselves and promoted from within. It's not easy to hire experienced China buyout professionals."

If CITIC has remained reasonably consistent in its approach to buyouts, the deals themselves have evolved in step with macroeconomic trends. The firm was previously a frequent investor in overseas businesses that offered a China expansion angle, but this has faded from the strategy in recent years. While Fund IV is being deployed against a backdrop of Sino-US trade tensions – and CITIC is less active in the US and Europe than before – Chew insists it is not for regulatory reasons.

"More fundamentally, it is driven by value," he says. "We must be cautious about how we underwrite our deals in what is a pretty uncertain macro environment. Valuations are still high globally and this makes some of these non-proprietary cross-border deals a bit harder to do."

The other factor is change within China. CITIC's international funds backed a string of US industrial businesses looking for a way into the country. Now it focuses more broadly on consumer assets.

"China used to mean cheap manufacturing for many US and European companies, but it's no longer that kind of place," Chew explains. "We would rather invest in consumer product companies like Trilogy [a New Zealand-based skincare products and fragrances producer] because China should be an important  growth market for them."   

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

• Topics
• Greater China
• Fundraising
• GPs
• Buyout
• Buyouts
• China
• CITIC Capital