China’s state-owned enterprise promise big returns for PE investors, as well as a big challenge.
By: Clare Burrows–
In 2013, private equity investment in China dropped to just $4.5 billion â€“ about 47 percent below the equivalent figure for 2012, according to data from Thomson Reuters. Since Chinaâ€™s dry powder level was estimated at $59 billion at the end of 2012, itâ€™s clear that Chinaâ€™s GPs need to find new ways to deploy the vast amounts of capital raised during better times.–
What seems to be catching the industryâ€™s eye more than ever are the countryâ€™s state-owned enterprises:large, government-controlled organisations, many of which are in dire need of restructuring. While state-owned enterprises account directly or indirectly for 60 percent of Chinaâ€™s GDP, according to research by China First Capital, almost 100 percent of institutional capital, especially private equity, has
been invested into Chinaâ€™s privately-owned sector.
However, as the number of traditional opportunities falls, â€œthis may leave investing in SOEs as the best, largest and most promising new area for private equity investment,â€ Peter Fuhrman, chairman and chief executive at China First Capital suggests.–
And, some industry sources ask: what better target for private equity than these bloated, inefficient giants, which the newly-appointed Chinese government is apparently so keen to reform? SOEs are highly compliant when it comes to tax and accounting laws (a rare phenomenon among Chinaâ€™s privately-owned companies). Better still, theyâ€™re a bargain â€“ because Chinaâ€™s State-owned Assets Supervision and Administration Commission (SASAC) regulates their price based on net asset value.–
â€œIf you have a highly profitable SOE that has very low net assets, you can potentially buy it at incredibly low P/E multiples,â€ Fuhrman says. With one deal China First is advising on, 51 percent of the business is being offered at 2x EBITDA, he adds. China First is currently acting as an investment banker for five of Chinaâ€™s largest SOEs, including China Aerospace, China State Construction, China Huadian, Wuliangye Group and Shandong Energy.
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