East meets West: China PE and European corporates

The change agent has, of course, been China. Between 2002 and 2005, domestic companies invested $900 million in Europe. Last year it was $9.3 billion, although Japan remained Asia's prime mover in Europe, driven by a combination of low borrowing costs, a strong exchange rate (at least then) and a desire to diversify, given the struggling domestic economy.

Many European companies find themselves in a similar position. Business models that were predicated on regional demand are no longer enough to satisfy recalcitrant shareholders and impatient lenders. Everyone wants to get into Asia - and particularly China - for a slice of emerging markets growth. The problem is they don't know how to do it.

Fortunately, there are plenty of private equity firms willing to help. Most players with US dollar-denominated funds now offer taking foreign companies into China as part of their investment thesis. Doing deals outside of China might mean easier valuations, while establishing a company in a new market is a clear value-add story that might impress potential LPs and investees alike.

Executing these strategies, however, requires a boot in each camp - ideas for a viable China strategy plus an understanding of the Western asset - and few are positioned as such.

First, the China angle. The typical target is not an established multinational, which has ample resources and experience and most likely went through its China teething troubles a decade or more ago. Mid-market firms, on the other hand, may only have seen the country as a strategic market for a few years or they already have an operation there but it isn't performing well.

The skill sets required often involve on-the-ground trouble-shooting. A European company might own a manufacturing plant in Guangdong and its margins are being consumed by a joint venture partner that is skimming cash off the top and rising labor costs. A possible solution is to terminate the JV and replace it with a wholly-owned subsidiary, and then shift the entire operation to lower cost area in China's interior.

Finding the right local partner is indeed important. When Fosun International teamed up with France-based vacation resorts provider Club Med in 2010, the Chinese company could offer expertise on the real estate side in constructing new resorts. Club Med has since opened two properties in China and seen a jump in Chinese tourist numbers (and last week Fosun and Axa Private Equity offered to buy out the business.)

A lot of Chinese private equity firms have the capacity to accomplish these tasks - they know who to call and how to spot a bad deal domestically. It is the European angle where they come unstuck.

Identifying suitable targets, and then paying a fair price for them, can be challenging without prior knowledge of the market. Legacy pension issues are a classic trouble-spot, with transaction advisory executives recalling instances when Chinese investors (usually strategics) have turned their back on deals on discovering that the liabilities far exceed what they had initially expected.

Once acquired, re-launching a company in China might require some deft footwork. There are integration issues with existing operations in the West, affiliate businesses that must be consolidated or cut loose, and potentially a stack of regulatory issues to wade through.

There are ways in which private equity firms can bridge the gap between East and West. Those with a presence in Europe can deploy operations people in China while anecdotal evidence suggests there are many Chinese PE firms are pitching European counterparts for potential business. It is difficult, however, to think of successful partnerships. Generally speaking, the larger and more global the private equity firm, the better equipped it is to take companies across borders.

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• Topics
• Greater China
• Europe
• Buyouts
• Expansion
• M&A
• buyout
• China
• Growth capital
• Europe