China-US: Outbound angst

It took seven months for the Lexmark International transaction to get from announcement to closing. The US-listed provider of printing and imaging products, software and services was subject to a $3.6 billion take-private bid from PAG Asia Capital, Legend Capital and Chinese printer manufacturer Apex Technology. Even though a definitive agreement was reached swiftly, the deal still required regulatory approvals in the US and China - and markets as diverse as Russia, Poland and Germany - as well as a complicated financing package.

The acquisition closed at the end of November and is arguably the purest example from 2016 of a PE-led Sino-US cross-border investment. PAG took a Chinese strategic player into a transaction it would probably otherwise not been able to attempt; and in doing so offered Lexmark the prospect of new growth opportunities in China and the wider Asia region.

For all the talk, there are relatively few examples of this in Asian private equity. Generally speaking, GPs pursue three types of cross-border China deals, and the other two types - joint ventures with overseas partners that want to focus on the China market and working with Chinese portfolio companies on outbound transactions - tend to be more common in a US context. When targeting solo acquisitions of US-based assets, Chinese PE firms come up against competition from other quarters, while working with strategic investors that provide extra ballast can leave a process hostage to outside forces.

PE was a miniscule player as Chinese corporates invested an astonishing $45.6 billion in the US last year, three times the 2015 total, which also represents the previous record high. Once heavily concentrated on natural resources, Chinese capital found its way into a broad array of industries in 2016, according to Rhodium Group, a boutique consulting firm. Real estate and hospitality, transportation and infrastructure, entertainment, electronics, and consumer products and services also featured strongly.

Some deals served as a reminder of where private equity came up short. While Hua Capital Management, CITIC Capital and Goldstone Investment managed to complete the acquisition of OmniVision Technologies, some semiconductor investments floundered. Fairchild Semiconductor International rejected a buyout bid from Hua Capital and China Resources Microelectronics because the risk of the Committee of Foreign Investment in the US (CFIUS) holding up the transaction was deemed too great. A few weeks earlier, Chinese PE firm Go Scale Capital was forced to scrap its acquisition of Philips' LED components division - a global deal with a US angle - after CFIUS expressed concerns.

Political sensitivities are likely to remain an issue in 2017. Rhodium observes that the fundamental drivers of investment remain unchanged: the Chinese economy is slowing and companies need to diversify; there is pressure to upgrade domestic brands and technologies; the growth outlook in the US is stronger than in Europe and other advanced economies; and the US dollar is expected to appreciate further against the renminbi.

However, President-elect Trump's apparently more hawkish approach to trade and investment policy regarding China poses a downside risk. Chinese companies have shown themselves increasingly willing to run the CFIUS gauntlet, but it is unclear how the agency's approach might change under the new administration. A Congressional-level attack on Chinese M&A, inevitably citing national security and economic concerns, could also hold back activity.

At the same time, facing capital outflows and downward pressure on the renminbi, the State Administration of Foreign Exchange (SAFE) has taken various steps to stabilize the situation. These include measures that make it harder for individuals or corporates to take money outside of China for whatever purpose and also specific controls on certain types of transactions.

The consensus view is that it will difficult for Chinese investors to replicate the magnitude of 2016's deployment this year, but this is not altogether bad news for Chinese private equity. While versions of the Lexmark deal might be somewhat less likely than before, GPs looking to secure deals have seen their path clear: anyone with a US dollar-denominated fund - i.e. capital that is already offshore - no longer has to contend with competition from often irrational sources of domestic money.

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• Topics
• Greater China
• North America
• Regulation
• Buyouts
• Investments
• China
• USA
• M&A