China cross-border: A helping hand

It is a classic roll-up strategy: accumulate multiple brands into a single platform with the scale and diversity of product offerings to go public. Investment and operations professionals with relevant skill sets are recruited or deployed to work on the team tasked with building out these restaurant interests.

Fast dining is not the only area in which the private equity firm has participated in cross-border transactions. Also last year, Hony paid RMB15 billion ($246 million) for a 12.43% stake in Chinese hotel operator Shanghai Jin Jiang International, becoming the largest institutional shareholder. A few months alter Jin Jiang agreed to buy Louvre Hotels, Europe's second-largest hotel group, from Starwood Capital.

In contrast to the restaurant space, there is no dedicated team to handle cross-border hospitality deals. So the GP chose not to act alone. Hony and Jin Jiang will help Louvre penetrate the China market while simultaneously using the newly acquired European network to accommodate Chinese tourists going overseas.

"When bringing brands to China we want to make sure we can amass the necessary resources, in addition to the capital, to aid expansion. In the case of fast food chains we have our management platform, which is good for Pizza Express. In areas where we don't have a management group, we want to work with an existing portfolio company that has a strong China presence," John Zhao, Hony's CEO, recently told AVCJ.

In the last couple of years there has been a lot of hype about Chinese private equity firms going overseas, but they have yet to make a significant imprint on major international markets. There are two oft-cited reasons for this, and both equally apply to Chinese strategic players: most middle-market assets come to market via a competitive process; and sellers are wary of Chinese buyers' ability to get deals over the finishing line.

The second reason is likely more prevalent, if only because of intermittent past horror stories, mostly on the strategic side. Particularly in the US, there have been concerns about enforcing compensation rights against a Chinese buyers if a deal breaks down and uncertainty as to where the money is coming from when the bidder is a loose consortium of financial institutions, for example.

However, among the more experienced players, the importance of a strong a local partner when entering into a deal is a recurrent theme.

Speaking at the Hong Kong Venture Capital & Private Equity Association's recent China summit, Michael Weiss, a partner at China cross-border specialist Sailing Capital highlighted his firm's acquisition of US lifestyle products retailer Brookstone last year, which was done with a view to rolling out the brand in China. Embarking on the deal alone would have been a very different proposition to partnering with Sanpower Group, which has a sizeable presence domestic retail.

Similarly, RRJ Capital acquired the Greater China franchise rights for Dunkin' Donuts in partnership with Philippines-based quick service restaurant operator Jollibee Foods Corporation. Jollibee, which is already active in China, will have responsibility for the day-to-day operations of the joint venture as they look to set up 1,500 outlets nationwide.

Vivian Lam, a managing director with RRJ, identified two critical factors when targeting cross-border transactions. The first is finding a good partner with strong local expertise. The second is building a competent in-house team so the GP is not wholly dependent on the local partner and the joint venture retains a degree of independence.

For all GPs with ambitions to bring foreign brands into China, there must be an initial internal capability to identify the opportunity and then close and monitor the deal - areas in which the local partner may not be so strong. Weiss noted that the shortfall for some Chinese groups is not a lack of cultural affiliation with their offshore targets as an inability to communicate in the language of transactions and understand global M&A norms.

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• Topics
• Buyouts
• Greater China
• Outbound investment
• China
• buyout
• Hony Capital
• sailing capital
• RRJ Capital