Deal focus: Investcorp finds optimal entry point with Jianuo

Investors have been known to pay a premium to access China’s relatively scarce private equity buyout opportunities. Investcorp declined to disclose the valuation for its debut control deal in the country, but the firm noted that timing worked to its advantage.

 

The target was Shandong Jianuo Electronics, a manufacturer of components for the electric vehicle and renewable energy industries. Duncan Zheng, head of China private equity at Bahrain-headquartered Investcorp, said the transaction was consistent with the firm’s strategy of backing mid-market businesses with EBITDA of USD 15m-USD 30m.

It helped, from a valuation perspective, that the deal was negotiated and signed last year prior to the reversal of China’s COVID-19 restrictions. In most cases, Investcorp’s investment committee despatches a member to make a site visit before signing off on a decision. An exception was made for Jianuo because it wasn’t possible to obtain a visa for China travel at the time.

“The main reason [for this exception] is the company’s strong financial performance. Our due diligence process was deep and stretched out, spanning three quarters. With each quarter, the numbers kept going up despite the lockdowns. That was very convincing,” said Zheng.

Even during the most severe restrictions on movement, Jianuo was running at almost full capacity, with workers maintaining an unbroken three-shift daily rota. The company is primarily located in Tengzhou, a small city in Shandong province far removed from hubs like Shanghai or Guangzhou. Recognising Jianuo’s role as a key job creator and significant taxpayer, the local government kept it open.

In addition to COVID-19, the transaction coincided with a weakening in investor sentiment towards China amid tensions with the US and an interest rate-driven uptick in the cost of financing for buyout investors with US dollar-denominated funds. Zheng noted that the financing issue “puts a cap on the multiple we can pay,” adding that investors generally have become more disciplined on valuations.

Nevertheless, it was hard to meet Investcorp’s four investment criteria – high growth, high margins, a high cash conversion rate, and a controlling stake – and eclipse attractive opportunities in other markets. The firm’s direct deals in China to date have focused on Hong Kong, where it acquired supermarket operator City Super and condiments supplier Heritage Foods.

EV beneficiary

Founded in 2000, Jianuo manufactures magnetic cores that feature in transformers and inductors, enabling efficient energy transfer, voltage conversion, and improving energy storage capability. One-quarter of its products go to EVs and the rest are used in charging station infrastructure, solar and wind energy conversion, 5G base stations, and data centres.

Exposure to the fast-rising EV and new energy industries has underpinned growth, but there is sufficient portfolio diversification to temper single-sector concentration risk, Zheng explained. Jianuo produces more than 400 kinds of cores for various specifications, while a focus on premium cores helps it maintain strong margins.

“One of the main reasons for wanting to acquire Jianuo was its positioning as the only pure-play premium core maker in the industry. These products are harder to make and command higher margins,” he added. “Globally, only a handful of premium core makers exist and most do normal cores as well as premium cores. Many are already listed and their stocks have performed well in the last few years.”

There is an environment, social and governance (ESG) angle as well. Three-quarters of Jianuo’s 400-strong workforce is female and the company is known locally for its commitment to gender diversity. Female employees are largely responsible for product inspection and testing prior to shipping. Jianuo also manufactures its cores using waste power derived from steel production.

Numerous investors have sought to build strategies around China’s dual carbon goal of achieving peak carbon dioxide emissions by 2030 and carbon neutrality before 2060 – to the point that some have even launched carbon neutrality funds. Jianuo, with its EV and clean energy customers and its energy efficient processes, is well-positioned from a strategic perspective, but Zheng plays down the significance.

Rather, he sees Jianuo in different context: founder succession. Investcorp’s China team approached Jianuo during sector studies intended to help identify companies likely facing difficulties in terms of transferring control to the next generation. Team members reached out to Jianuo’s family owner in early 2022, but it still took months to build sufficient trust that they were comfortable selling.

“We convinced them that an IPO might not be the best route in their case because they need to transition from a family-run business into a professionally run business,” said Zheng.

Investcorp’s priorities for Jianuo include improving operational efficiency and expanding the customer base internationally. At present, the company serves Apple and Emerson Electric, but most customers are domestic.

Zheng added that the team got traction with the Jianuo's founders by highlighting Investcorp’s role in supporting global expansion as a backer of family-run businesses such as Gucci and Tiffany. “They wanted to be part of that journey,” he added.

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• Topics
• Greater China
• Buyouts
• Cleantech
• Industrials
• China
• Investcorp
• Cleantech
• Electric Vehicles
• manufacturing