Deal focus: European GPs net 17x return on China play

When foreign carmakers formed joint ventures with their Chinese counterparts nearly 30 years ago as a means of accessing the China market, the level of technology transfer was limited. Knock-down kits were shipped in for assembly with the most valuable intellectual property remaining in the US, Germany or Japan.

As a result, when Chinese carmakers began to develop more sophisticated vehicles, there were gaps in the domestic supply chain, including automatic transmissions. The leading global players in continuously variable transmission (CVT) technology - which allows engines to run at optimal efficiency - were Jatco and Aisin Seiki, aligned with Nissan and Toyota, respectively.

This created an opening for Belgium's Punch Powertrain, which has seen its turnover increase almost fivefold to EUR326 million ($362 million) over five years, while headcount has grown from 210 to more than 2,100. China now accounts for 80% of its customers and a large part of its manufacturing. This was not the case when Gimv and Capricorn Venture Partners acquired a majority stake in Punch from Belgian investment agency LRM in 2010 for EUR24 million.

"The idea was there but it was very early days," says Jos Peeters, founder and managing partner at Capricorn. "They had a very small assembly line in Nanjing and two Chinese customers, which were still in prototype development, not full production. Part of the money we invested was used to build a larger factory in Nanjing and to develop additional drivetrains and get customer traction."

Recognizing the significance of Chinese demand, Gimv and Capricorn - which owned 46% and 12% of Punch, with LRM retaining 38% - also sought out a local partner. New Horizon Capital duly came in towards the end of 2013, taking a 30% stake. Gimv's interest fell to 32% while Capricorn's ownership dropped to 8.5%.

"We wanted a group that was deep in China, not a Hong Kong-based fund, and one that could take a minority position," says Bart Cauberghe, a partner with Gimv. "It also had to be a firm with international LPs so we were sure everyone was aligned, with no underlying strategic interests."

Punch has since entered a new phase of growth that will see annual capacity - in China and Belgium - rise from 300,000 to 1.3 million units. However, this process will be overseen by a new owner. Chinese real estate developer Yinyi Group agreed to buy Punch at a valuation of around EUR1 billion ($1.1 billion), based on forecast sales of EUR500 million in 2016 and EBITDA of over EUR100 million.

All PE investors will exit, pending regulatory approvals, with Gimv and Capricorn generating multiples of 17x and gross IRRs of around 60%. Nevertheless, Peeters and Cauberghe see further upside for Punch, not least because of the new products the company has introduced. "We are seeing products with higher torque, which are suitable for SUVs, and also hybrid and fully electric drivetrains, which are high on the agenda for China," says Peeters.

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• Topics
• Europe
• Greater China
• Trade sale
• Industrials
• manufacturing
• automobiles
• China
• Exit