China exits: Time to trade

In 2014, total proceeds came to $4.8 billion, the lowest in five years. But the 2013 figure of $7 billion was inflated by Baidu's $1.85 billion acquisition of 91 Wireless (several VCs sold minority holdings). Similarly, in 2012, Goldman Sachs received $2.3 billion from Temasek Holdings for a 1% interest in Industrial and Commercial Bank of China.

More significantly, AVCJ Research has records of 69 trade sale exits in 2014 up from 54 and 36 in each of the previous two years. It is the largest-ever annual total, topping 59 in 2010.

The momentum appears to have carried into 2015, although in this particular instance the impact is very much in dollar terms. Two PE funds managed by China International Capital Corporation last week agreed to exit Jiangyin Tianjiang Pharmaceutical as part of China Traditional Chinese Medicine's (China TCM) $1.34 billion acquisition. The funds, which own just over 30% of the firm, sould receive about $532 million.

The deal is also a strong example of one of driving forces behind this trade sale surge. China TCM was acquired by a Hong Kong subsidiary of state-owned China National Pharmaceutical Group Corp. in 2013. With the subsequent purchase of Tongjitang, China TCM kicked off an M&A spree that is expected to run for some time.

There is no single founder-controlling shareholder in Jiangyin Tianjiang; the chairman and founder of the company agreed to sell a less than 10% stake to China TCM, which is picking up an 81.5% interest from multiple shareholders. However, it does point to pragmatism in the face of a changing opportunity set.

Industry consolidation is certainly an interesting theme, and it doesn't have to be led by a state-owned enterprise. A host of locally-listed Chinese companies are on the lookout for acquisition opportunities through which they can stay on course with growth projections. Buying up rivals can be challenging for corporate China but if there is a minority PE investor keen to exit then it can play agitator or facilitator in order to get a deal done.

Another trend is the greater willingness among entrepreneurs to completely sell of a business - perhaps due to advancing age, an increasingly difficult commercial environment, or recognition that another group is better positioned to lead the next stage of growth. These situations are as much an opportunity for PE firms to secure buyouts as they are for minority backers to get out.

According to AVCJ Research, only two trade sales in which a private equity investor has exited a control position have topped $600 million: TPG Capital's sale of UT Capital to Haitong Securities in 2013 and Affinity Equity Partners and Unitas Capital's exit of Beijing Leader & Harvest Electric Technologies to Schneider Electric in 2011.

This select group will enlarge if China buyouts evolve in the way the industry hopes.

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• Topics
• Exits
• Greater China
• China
• Exit
• Trade sale