On the lookout for synergy and experience

One legacy of the world financial crisis is Chinese firms' growing interest and expertise in private equity

Chinese private equity firms are increasingly investing in Europe, helping to bring about synergy between Chinese and European economies and businesses.

They are partnering with Chinese investors to acquire European companies, particularly after the financial crisis, when valuation became favorable. After the acquisition, they help to restructure the resources to suit the Chinese market, generating surging revenue.

Judie Ng Shortell, a partner of the global law firm Linklaters, says the trend of outbound Chinese private equity deals is relatively recent and is growing fast. For example, state-backed Hony Capital bought about 18 percent of Compagnia Italiana Forme Acciaio SpA, an Italian machinery maker, in 2008.

In 2012, Chinese private equity fund Citic bought Putzmeister, a German company that makes high-tech concrete pumps, alongside Chinese heavy industry firm Sany. Sany bought 90 percent and Citic the rest.

"PE funds can lend liquidity and financing, additional to bank loans," Shortell says. "A more important aspect is that private equity firms' execution capability will help to get deals done."

Many Chinese companies doing outbound deals have little experience in doing so, so by introducing a private equity investor they can draw on the private equity partner's experience, she says.

However, one difficulty with this type of arrangement is the exit strategy, because private equity firms typically have an investment horizon of just three to five years, and they have a particular percentage return rate in mind, whereas strategic investors invest for the long term.

To overcome this difficulty, the two parties would need to negotiate a fixed-term exit, at which point the private equity partner sells its stake to the investor.

Shortell says Chinese private equity firms such as Hony Capital and Hopu Capital are becoming more mature and are doing businesses very well in China, so they are looking at opportunities to expand their businesses outside the country.

Chinese private equity funds are in a better position than Western funds to partner up with Chinese investors for overseas investment because they can establish better relationships with Chinese partners and can syndicate the investment out to other private equity funds in China, which helps spread risk.

Another noticeable trend is Chinese private equity funds taking private some companies already listed on overseas stock exchanges, typically Nasdaq and the New York Stock Exchange, and then relisting them on Chinese or other Asian stock exchanges, Shortell says.

This activity normally occurs in situations where the private equity fund believes the valuation on the Chinese or other Asian stock exchanges are more desirable than on overseas stock exchanges, she says.

One notable Chinese private equity firm investing in Europe is ChinaEquity, a Chinese private equity firm founded in 1999, which at the time mainly helped European investors inject capital into Chinese opportunities, but its activity has recently gone into reverse.

John Liu, partner and managing director of ChinaEquity Group, says his firm's business model is to match up Chinese and Western businesses and become an equity stakeholder in the investments it makes.

In the process, he says, ChinaEquity helps the resultant venture "to grow and succeed" in both markets.

One of its most high-profile deals so far came in 2012, when it joined forces with other co-investors including Italian private equity group Investindustrial in a 37.5 percent stake, worth 150 million pounds ($227 million; 191 million euros), in the British carmaker Aston Martin.

ChinaEquity is also the founder of the China Team, the first Chinese national sailing team to race in the America's Cup, and a big investor in the China Grand Rally, the longest event of its kind in the country, which involved 50 teams and more than a 100 cars last year.

Liu says there is growing hunger for top-end investments in Europe by Chinese investors, "because what Europe has can be brought to China to satisfy China's increasing consumption demands".

ChinaEquity, as one of China's earliest private equity investment firms, has become one of the country's most successful. It started its overseas fund management business in 2000 when a US dollar fund was set up that had early partners including well-known European brands Porsche and Adidas.

Its top 10 limited partners include investment giants Morgan Stanley and Goldman Sachs. In 2009 it set up its first renminbi fund, and by the end of last year it was managing four private equity funds and three venture capital funds, worth 3 billion yuan ($481 million, 346 million euros).

cecily.liu@chinadaily.com.cn

(China Daily Africa Weekly  01/09/2015 page16)