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China the top destination for private equity
(China Daily)
Updated: 2007-02-12 13:34 The group invested US$25 million in China Mengniu Dairy Company in 2002 and another US$35 million a year later for 28 percent control, working behind the scenes to help the company expand, innovate, focus on quality and, critically, become a Western-style marketing phenomenon. Ultimately, the investors helped underwrite the dairy's successful initial public offering (IPO) on the Hong Kong Stock Exchange in 2004. After two years, the private equity investors earned an estimated four times their original investment, while Mengniu continues to thrive. China's largest milk producer by sales volume, the public company's net profits rose 43 percent in 2005. Third, they are over-investing in due diligence. Due diligence is a difficult task anywhere, but in China, it's more daunting and more important. Unofficial payments and other hidden costs are part of doing business in China, and they aren't reflected in a profit-and-loss statement. Because published accounts aren't as transparent as they are in other regions and sources of information are inconsistent, it's hard to get a handle on true costs and industry competitors. Meanwhile, markets are fragmented and rapidly changing. To compensate, private equity investors exercise more rigorous fact-gathering and seek information of a higher grade of detail than in other regions. They focus on primary sources of information, talking to customers to help understand the market and to different channel players to learn how margin structure works. They track pricing at stores. They piece information together by comparing notes from wholesalers and retailers. It's likely that such due diligence led investors Blackstone and Bain Capital to pull out of its deal with China's home appliance and electronics manufacturer Haier to acquire Maytag. Among other important factors, thorough due diligence no doubt found that Haier simply didn't have the ability to compete with Whirlpool, whose bid had increased Maytag's price tag. Fourth, they are staying nimble. US-based private equity firms usually think in terms of a three- to five-year holding period for the companies in their portfolios. (For more biz stories, please visit Industries)
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