Helping corporate China go abroad

This was Chinese Vice Premier Wang Qishan's response to a request from Xiang Wenbo, president of Sany Heavy Industries, for central government assistance in overseas acquisitions.

Sany Heavy's ambitions are entwined with the role of private equity in outbound investment by corporate China. In September 2008, six months before Wang made his remark, the Hunan-based firm reportedly lost out on a $422 million deal for Italy's Compagnia Italiana Forme Acciaio (CIFA). The winner was provincial rival Zoomlion, a Hony Capital portfolio company. In February of this year, Sany Heavy finally secured an overseas acquisition of its own, buying Germany's Putzmeister for $475.9 million. Sany took 90%, with CITIC Private Equity taking the remainder in return for its transactional expertise and, presumably, some advice on post-deal integration.
So what is the best way for private equity to participate in Chinese outbound investment - the Hony model, the CITIC PE model, or something else?

Chinese outbound M&A activity has been sharply rising since 2004, with deal volume exhibiting annual growth of 24.4% and deal value rising nearly 10-fold. Large-ticket investments are dominated by natural resources, with manufacturing the second most popular area. Chinese companies are being wary, picking up assets where they see value and a clear integration structure, rather than just for the sake of it. Wang's words, it appears, are being heeded.

It is now commonplace for investment banks running asset auctions to send teasers to Chinese corporates, whether they are genuinely prospective buyers or not. Similarly, there are plenty of intermediaries shopping opportunities to these companies in return for a slice of the deal. There is nothing wrong with this - indeed, Chinese players might be so preoccupied with domestic business or inexperienced in overseas M&A that they appreciate a little prodding.

However, outbound transactions are most effective when they form part of a concerted corporate strategy. In this respect, PE firms are best served to act as facilitators, and the deeper their involvement in the process, the more they stand to gain financially. According to industry sources familiar with the Putzmeister deal, CITIC PE came in at a reasonably high valuation. By contrast, Hony backed Zoomlion two years before it acquired CIFA, and the company's revenues have increased 23-fold ever since.

The challenge in any deal is creating a true alignment of interest, something which is often difficult given that PE firms operate within restricted investment timeframes, while their strategic counterparts have a longer-term outlook. One approach that appears to address this issue involves the GP acting almost as a personal shopper for the corporation.

In these situations, the GP's value-add is its ability to identify companies with potential, execute a transaction and then restructure the asset in a way that maximises the China appeal. What follows is a slow integration with the corporate buyer, the GP using its familiarity with both parties to ease the transition. The GP exits via a trade sale while the Chinese corporate secures a smooth passage through what might otherwise have been a difficult M&A process.

Success relies on the private equity firm understanding the Chinese company: its strategic requirements, its concerns and even the personalities of key decision makers. Perhaps these relationships are still in the process of being forged, but it is a trend worth watching.

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• Topics
• Greater China
• Buyouts
• Outbound investment
• China