Chinese PE firms seeking more synergy through international purchases

Private equity firms from China are increasingly investing overseas, helping to bring about synergy between Chinese and Western economies and businesses.

At the moment, many of these firms are partnering with Chinese investors to acquire Western companies, particularly since the financial crisis when valuations became more favorable. After acquiring a company, they help to restructure the resources to suit the Chinese market, generating surging revenue.

Judie Ng Shortell, a partner at the global law firm Linklaters, says the trend of outbound Chinese private equity deals is growing fast.

For example, State-backed Hony Capital bought about 18 percent of Compagnia Italiana Forme Acciaio, an Italian machinery maker, in 2008.

In 2012, a private equity fund of CITIC bought Putzmeister, a German company that makes high-tech concrete pumps, alongside Chinese heavy industry firm Sany. Ninety percent went to Sany and CITIC bought 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 this field, so by introducing a private equity investor they can draw on the partner's experience, she says.

However, one difficulty with this type of arrangement is the exit strategy. 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 aim 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 Investment Management are becoming more mature and are doing business successfully in China, so they are looking at opportunities to expand their businesses outside the country.

Chinese funds are in a better position than Western ones to partner with Chinese investors for overseas investment because they can establish better relationships with partners at home 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 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 fund believes that valuations on Asian stock exchanges are more desirable than on overseas stock exchanges, she says.

One notable Chinese private equity firm investing overseas is ChinaEquity. Founded in 1999, the Beijing-based firm started out by helping European investors inject capital into Chinese opportunities, but its activities have recently gone into reverse.

John Liu, managing director of ChinaEquity, 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 came in 2012, when it joined forces with other coinvestors including Italian private equity group Investindustrial in a 37.5 percent stake, worth 150 million pounds ($227 million), 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－which involved 50 international teams and more than 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, is among the country's most successful. It started its overseas fund management business in 2000 when a US dollar fund was established with early partners including famous European brands like Porsche and Adidas.

ChinaEquity's top 10 limited partners include investment giants Morgan Stanley and Goldman Sachs. In 2009, the firm set up its first yuan fund, and by the end of last year it was managing four private equity funds and three venture capital funds, worth 3 billion yuan.