Deal focus: GL Capital plots careful China carve-out

Ever so quietly, China-focused healthcare investor GL Capital has completed a buyout worth more than USD 200m. The target is Huizhou Foryou Medical Devices, a local contract development and manufacturing organization (CDMO) that specialises in wound care products. The sale process launched in June 2022 and the transaction closed earlier this month.

“It is a proprietary deal. We are the only investor involved in the process,” said Shirley Lin, a partner of GL Capital. This is largely due to the nature of CDMO businesses. They manufacture products for global brands and these clients are very sensitive to change-of-control situations involving their suppliers. For a private equity buyer, gaining the trust – and continuing custom – of clients is critical.

GL Capital addressed this by going into the process with a development strategy for Foryou Medical completely mapped out, including answering questions about the future product direction and the resources it can provide to support the company during its next stage of evolution.

“As part of due diligence, we had to communicate with clients not only to understand their current partnerships, but also to share our vision and views for the company,” said Dalin Cao, a managing director at GL Capital. “We wanted to help them understand who we are and strengthen their confidence in us as the new controlling shareholder.”

Founded in 2005, Foryou Medical makes functional dressings for chronic and acute wounds. Standard dressings are wrapped around the wound; the functional kind also accelerates healing. For example, gauze is replaced by hydrophilic fibres to ensure a humid environment, biodegradable materials are used to curtail blood seeping, and silicone-based products prevent or reduce scar formation.

Foryou Medical supplies all major global brands and has developed several brands solely for domestic customers. A functional wound care product is typically 2-3x more expensive than a standard product in overseas markets; the premium is up to 5x in the domestic market, according to Cao. It generated CNY 214m (USD 31.1m) in revenue in 2021, posting 30% year-on-year growth in core product categories.

GL Capital will retain the company’s existing CEO and senior management while bringing in a “think tank” to further enhance overseas and domestic sales channels. Two local strategic partners have already been introduced to Foryou Medical to explore different partnership possibilities.

Cao noted that the deal value is much lower than those commonly seen for similar assets in the public markets. Lin added that GL Capital tries to avoid following popular investment themes because there is a heightened risk of overpaying for assets.

“Following the market correction in the healthcare sector, we are seeing more buyout opportunities,” Lin said. “Private equity investors are gradually shifting back from pre-revenue stage investments to focus on more mature companies that can generate strong cash flow.”

Foryou Medical is a corporate carve-out, although the structure is not straightforward. The company was an affiliate – as opposed to a subsidiary – of A-share-listed Foryou Corporation, a manufacturer of automotive electronics and components. The two companies had the same shareholders but they had little else in common and the lack of synergies gave impetus to the notion of divestment.

The previous shareholders preferred a full sale to a spinout via a separate A-share listing because it meant they could make an immediate cash exit rather than wait for lockups to expire.

Foryou Medical is the first investment made by GL Capital’s fourth US dollar-denominated fund, which is currently in the market. It not only represents a continuation of the firm’s healthcare thesis but also underlines its ability to execute onshore leveraged buyouts. The GP opted for renminbi financing, despite investing out of a US dollar fund, to insulate itself from global interest rate hikes.

“In the past, it was rare for US dollar funds to complete buyouts using renminbi leveraged financing,” said Lin. “Now, though, it is increasingly common, which is a positive development for the industry.”

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• Topics
• Greater China
• Buyouts
• Healthcare
• China
• medical devices
• GL Capital
• Leveraged finance