PE and Chinese outbound investment

The transaction is significant on several levels, not least its timing, the nature of the assets, and the role played by private equity.

Days earlier, John Zhao, CEO of Hony Capital, used his Davos platform to argue that foreign prejudice against Chinese outbound investment is unfair. He said the world should remember that many firms are taking their first steps into foreign markets and still learning the rules.

Zhao's remarks should be taken in the context of growing concern about Chinese companies capitalizing on economic difficulties in Europe to pick up assets on the cheap. The message from the hawks is clear: China Inc - state-owned or implicitly state-backed, and acting on state orders to gather up foreign assets - is coming to eat your lunch. The reality is more nuanced.

It is ironic that Sany Heavy is involved in an outbound, PE-backed buyout. Back in 2005, the firm went on the offensive in response to The Carlyle Group agreeing to purchase Xugong Construction Equipment, an asset Sany itself coveted. Sany President Wenbo Xiang said that the deal was priced too low and wasn't in China's best interests. Xugong became a political hot potato and the agreement eventually lapsed.

For foreign PE investors watching the situation, there were a few takeaways: Don't try large buyouts of state-owned enterprises; pay attention to what the Chinese government officially classifies as a strategic industry and how far definitions might be made to stretch; and if you need approval for a transaction in which there are numerous directly and indirectly interested parties, lobby judiciously.

Investment in China is challenging and the regulators are rightfully criticized for their opacity. Yet Chinese companies can claim to have experienced just as much bother overseas. China National Offshore Oil Corp. (CNOOC) ran into a political storm when it bid for US oil firm Unocal in 2005, while Huawei has seen US regulators express concern over several acquisitions.

But Chinese firms are learning to pick their targets. For all the talk of a surge of outbound investment, big ticket acquisitions tend to involve natural resources in developing countries. In other sectors, companies either fly under the radar with smaller deals or identify distressed assets that aren't likely to cause a political ruckus.

With the Putzmeister acquisition, there are grounds for saying that both sides will benefit. Sany, which has already surpassed its German rival as the world's largest concrete pumps manufacturer, will obtain a marketing channel in Europe. For Putzmeister, the deal will wipe out its debts and solve the founder's succession problem. The deal still requires regulatory approval but there's no suggestion it won't come.

Where Chinese companies still fall short is on deal execution. Aspiring buyers are routinely criticized for spending too long deliberating in competitive situations or failing to put together propositions that convince sellers they can add value or even get government approval.

Bright Food Group's multiple failures to land overseas assets before acquiring Manassen Foods last year are seen as testament to these problems. So too is China Development Bank's failure to buy Royal Bank of Scotland's (RBS) aviation-leasing unit, despite making the highest bid. RBS executives were reportedly spooked by the limited time CDB spent inspecting the asset and the possibility that Beijing might nix the deal.

In these situations, perhaps PE can play a role. Standard concerns about a misalignment of interest between strategic and financial investors aside, a PE firm with experienced international dealmakers is well positioned to manage expectations, facilitate financing and offer guidance on post-deal integration.

Based on Hony's success with Zoomlion and now CITIC PE's partnership with Sany, it is also worth noting that domestic private equity firms might ultimately be the ones that benefit most.

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• Topics
• Greater China
• Buyouts
• Europe
• Regulation
• China
• Europe
• buyout
• Hony Capital
• Citic Private Equity
• Outbound investment
• regulation