China Investment Banking

Goldman, Lazard China Dealmakers Decamp for Upstart Funds — Bloomberg

Leave a Comment / August 11, 2020

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(Bloomberg) — Veteran China dealmakers at Wall Street banks and Western buyout firms are heading for the exits, in search of the more lucrative deals and higher remuneration offered by smaller funds.

Three senior merger advisory bankers from Goldman Sachs Group Inc., Bank of America Corp. and Lazard Ltd. have resigned within the past month for senior roles at fledgling investment funds, according to people familiar with their departures, who asked not to be identified discussing private information. Carlyle Group LP Managing Director Alex Ying left the firm in January after two decades to set up Rivendell Partners, which focuses on mid-sized buyouts in Greater China and Vietnam, other people said.

The moves highlight the increasing challenges big banks face in retaining their top dealmakers in an environment of tighter regulations and shrinking fees. Revenue from investment banking in the Asia Pacific region fell 8 percent in 2016 to the lowest in at least five years, according to data from research firm Coalition. Merger advisory revenue dropped 4 percent, the figures show.

“Deal flow from China has come down considerably — those flows are severely curtailed relative to where they were,” said Henry Tillman, chairman of London-based advisory firm Grisons Peak LLP. “With investment banking revenue declining, people are going to look at their options.”

Imminent departures include Andrew Huang, a managing director advising on Greater China mergers and acquisitions at Goldman Sachs who has resigned to join Chinese private equity firm FountainVest Partners, according to the people. Peter Kuo, a China M&A banker at Lazard, is leaving to help run a technology fund backed by Chinese investors called Canyon Bridge Capital Partners, the investment firm confirmed in response to Bloomberg queries.

Higher Returns

Ellis Chu, head of China M&A at Bank of America, has also resigned and will be joining an Asia-focused fund, the people said.

Spokesmen for Bank of America, Goldman Sachs and Rivendell declined to comment on the departures. A representative for Carlyle confirmed Ying’s departure, declining to comment further. FountainVest Chief Executive Officer Frank Tang didn’t answer calls to his mobile phone seeking comment.

Running or working for a smaller, Asia-based fund can offer managers greater independence in decision-making on deals and give them a bigger share of fees and profits from exiting investments. Senior executives at global buyout funds in Asia typically have to share 40 percent to 60 percent of deal fees generated in the region with U.S. and European counterparts, people familiar with the practice said.

Smaller funds are also making more money. Private funds in Asia with assets of $500 million or less had a median internal rate of return of 16.1 percent over a three-year timeframe, compared with 11.5 percent at peers with more than $1 billion of assets, according to data compiled by research firm Preqin Ltd.

High Turnover

“A reason these guys are leaving likely also includes the fact those big firms have been having a challenging time of late in China, which leads to higher work pressure and unusually high turnover,” said Peter Fuhrman, chairman of Shenzhen-based China First Capital. “You can then try to set up on your own, make some deals, hope for success.”

The exits follow other recent moves to smaller outfits. KKR & Co.’s two most senior China executives left in December to form a China-focused investment firm. Richard Wong, an M&A veteran at Morgan Stanley, resigned this month after 16 years to help set up Nexus Point Partners, a China-focused buyout fund started by MBK Partners Ltd. co-founder Kuo-Chuan Kung.

The bankers and their new funds will face challenges when it comes to sourcing China deals. The government is clamping down on money outflows, which augurs poorly for outbound acquisitions. What’s more, competition is increasing from Chinese securities firms. Three Chinese banks ranked in the top 10 advisers on offshore acquisitions by mainland companies since the beginning of 2016, according to data compiled by Bloomberg.

Among the first buyout specialists to make the leap from big outfits were KY Tang, who left UBS AG’s private equity fund in 2004 to start Affinity Equity Partners, and Michael Kim, who set up MBK in 2005 with five other senior Asian executives from Carlyle. In 2010, TPG Capital lost Shan Weijian, who left to found PAG Asia Capital. The next year, Mary Ma departed to help start Boyu Capital.

https://www.bloombergquint.com/markets/2017/03/30/veteran-china-dealmakers-leave-wall-street-for-upstart-funds

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China’s Healthcare Sector a Big Draw for Private Equity Investors — South China Morning Post

Leave a Comment / January 19, 2017

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China’s healthcare sector a big draw for private equity investors

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PUBLISHED : Wednesday, 18 January, 2017
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Private equity firms and hedge funds are investing heavily into China’s healthcare industry in a bet on the sector’s upbeat growth potential, fund managers told a Hong Kong forum.

Private hospitals and drug makers are among the bright spots for investors focusing on China, where rising income and an ageing population are boosting the demand for quality medical services.

Private hospitals are set to attract large amounts of capital in the coming decade amid an underdeveloped private medical industry and a shortage of doctors, said investment professionals.

“Healthcare has been the single area that probably everyone can foresee globally an enormous amount of capital and investment,” Peter Fuhrman, chairman of China First Capital told the Asia Private Equity Forum in Hong Kong on Wednesday.

China’s population of individuals aged 60 or older is set to rise 90 per cent to 240 million by 2020, according to the World Health Organisation.

Meanwhile, one consequence of the nation’s one-child policy, introduced in 1979 and officially phased out in 2015, is that the burden of caring for ageing parents will put tremendous pressures on the young generations.

The healthcare sector in China will become a US$1 trillion a year business by 2020, according to a report by consulting firm McKinsey & Company.

Among healthcare institutions, private hospitals are set to become the best investment for this sector, said Li Bin, chief executive of Ally Bridge LB Healthcare Fund, a hedge fund that focuses on investing in China and Asia healthcare companies.

However, he said there are problems that will likely hinder the industry’s growth.

Among barriers, Li cited a shortage of quality doctors, the lack of an ecosystem to support the development of private hospitals, as well as the long time frame needed to build up a trusted reputation.

Although about half of the hospitals in the country are private, more than 80 per cent of medical professionals work in the public sector, which offer higher salaries and better career prospects, according to a recent report by Citi.

“Five years ago I said it would take 10 years for private hospitals to mature in China, now I think it would take another 10 years,” he said.

Alice Au Miu Hing from SpencerStuart, an executive search consultancy, said it remains extremely difficult to find experienced private hospital executives with China experience who can speak Putonghua.

“The common approach now is to bring someone from the industry from outside and see if the person can survive in the mainland market,” said Au.

Meanwhile, pharmaceutical and biotech start-ups will flourish with China’s emerging middle class seeking better healthcare services.

Judith Li, partner at the life science-focused Lilly Asia Ventures, told the forum that China spends about 6 per cent of its GDP on healthcare, versus an Organization for Economic Cooperation and Development average of 10 per cent.

“China has so many white spaces where there is nothing exists, and it’s very compelling,” she said.

“If you can bring it [a drug] from the US, you can then avoid the fundamental scientific risk of developing something that’s completely unavailable.”

http://www.scmp.com/business/article/2063273/chinas-healthcare-sector-big-draw-private-equity-investors

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Turbulence and Paralysis: the Year Ahead in US-China Relations — Financial Times

Leave a Comment / August 11, 2020

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A month before his official inauguration, Donald Trump is already tossing diplomatic grenades in China’s direction. It is a sign of things to come. 2017 is shaping up to be a highly eventful, taut and precarious year for China-US relations. This is partly due to a simple scheduling coincidence.

2017 will be the first time ever when both the US and the PRC in the same year will usher in new governments. The US will kick things off on January 20th by swearing in Donald Trump as President. China, meanwhile, will undertake its own large political upheaval, its five-yearly change in political leadership, culminating in the 19th Communist Party Congress sometime late in the year. Virtually the entire government hierarchy, from local mayors on up, will be changed in a monumental job-swapping exercise orchestrated by Xi Jinping, China’s president.

The US under Mr Trump, with a Republican Congress at his back, seems intent to challenge China more assertively in trade, investment and as a currency manipulator while intensifying the military rivalry. China’s leadership, meantime, will become deeply absorbed in its own highly secretive, inward-looking and internecine political maneuvering. While Mr Xi tries to further consolidate his power, Mr Trump will likely be asserting his, leading to a globally ambitious US and an introspective China. This would represent something of a role reversal from recent precedent.

With the chess pieces all in motion, businesses should be plotting their moves in China with caution. The proposed Trans Pacific Partnership (TPP) trade deal is dead, leaving China’s still-evolving “One Belt,One Road” initiative as the main impetus for new trade flows in Asia. Donald Trump says he will push for what he claims to be more “more fair” bilateral trade deals. China, with its $365bn trade surplus with the US and high barriers to much inward investment, is clearly in his sights.

How will China react? The only certainty is that as the year progresses, China’s government apparatus will slow, and with it decision-making at policy-making bodies and many State-owned enterprises (SoEs). All will wait to hear what new tunes to march to, once the new ruling Politburo is revealed to the public in the fourth quarter.

Chinese officials at all levels are already jockeying for promotion. That means falling into line with Mr Xi’s anti-corruption campaign. The Party Secretary in Jiangsu province, one of China’s wealthiest, got an early head start. He instituted his own form of localized prohibition, ordering that government officials could no longer drink alcohol at any time, in any kind of setting, anywhere in Jiangsu.

The booze embargo did include one loophole. If senior foreign guests are present, alcohol can flow as before, like an undammed torrent.

As the Party Congress approaches, it will be even harder to get a deal with a Chinese SoE lined up and closed within any kind of reasonable time frame. Even after the Party Congress ends, it will likely take more months for any real deal momentum to return. Investment banking bonuses along with billings at global law, accounting and consulting firms are all likely to take a hit.

One other certainty: the renminbi will come under increasing pressure as the US ratchets up its moves to apply tariffs to Chinese exports and China’s own economy remains, relatively speaking, in the doldrums. How much pressure, though, is another question.

Anyone making predictions about the speed and degree of the renminbi’s decline is playing with a loaded weapon. A year ago some of the world’s biggest and loudest hedge fund bosses, including Kyle Bass, David Tepper and Bill Ackman, were proclaiming the imminent collapse of the renminbi. The renminbi, despite slipping by about 6 per cent during 2016, has yet to behave as the money guys predicted.

The Chinese government uses non-market mechanisms to slow the renminbi’s decline. A recent example: its abrupt move in November to tightly control outbound investment and M&A. But shoring up the currency will undercut one of China’s larger economic imperatives, the need to upgrade the country’s industrial and technological base. That will require a prodigious volume of dollars to acquire US and European technology companies such as recent Chinese deals to acquire German robot-maker Kuka and US semiconductor company Omnivision.

Chinese investors and acquirers not only face tighter controls on the outflow of US dollars. The US is also becoming more antagonistic toward Chinese acquisitions in the US and globally. Deals of any significant size need to pass a national security review overseen by a shadowy interagency body known as the Committee on Foreign Investment in the United States, or CFIUS.

CFIUS works in secret. In recent months, it has blocked Chinese investment in everything from a San Diego hotel, to Dutch LED light bulbs as well as US and European companies more explicitly involved in high-tech industry including semiconductor design and manufacturing. The strong likelihood is CFIUS will become even more restrictive once Mr Trump takes over.

Unlike most areas of bilateral tension between the US and China, this is one area where the Chinese have no room to retaliate in kind. China already has a blanket prohibition on investment by US, indeed all foreign companies, into multiple sectors of the Chinese economy, from tech industries like the internet and e-commerce all the way to innocuous ones like movies, cigarettes and steel smelting. So, for now, China quietly seethes as the US intensifies moves to prevent China investment deals from being concluded.

China will probably need to regroup and start playing the long game. That means investing more in earlier stage tech companies, especially in the Silicon Valley, and hoping some then strike it big. These venture capital investments generally fall outside the tightening CFIUS net. China wants to spend big and spend fast, but will find it often impossible to do so.

Even as political and military tensions rise between the US and China in 2017, one ironic certainty will be that a record number of Chinese are likely to go to the US as tourists, home buyers or students and spend ever more there. China’s ardour for all things American – its clean air, high-tech, good universities, relatively cheap housing, and retail therapy – is all but unbounded.

If informal online surveys are to be believed, ordinary Chinese seem to like and admire Mr Trump, especially for his business acumen. Mr Xi, understandably, may view the new US President in a harsher light. Xi faces cascading complexities as well as factional opposition within China. He could most use a US leader cast in the previous mold, committed to constructive cooperation with China. Instead, he’s likely to contend with an unpredictable, disapproving and distrustful adversary.

https://www.ft.com/content/b1801637-4219-3222-9f45-658740aa1187

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CICC eyes return to greatness — IFR Asia

Leave a Comment / August 11, 2020

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China International Capital Corp has unveiled its much-anticipated acquisition of unlisted China Investment Securities, in a move that may see the PRC’s oldest investment bank regain the top spot in the country’s securities industry.

CICC said on November 4 it planned to acquire 100% of Shenzhen-based CIS for Rmb16.7bn (US$2.47bn) through the issuance of 1.68bn domestic shares to current owner Central Huijin Investment at Rmb9.95 each. The issuance price represents a discount of 0.6% to CICC’s closing prior to the announcement of the proposed acquisition.

The move marks a significant shift in strategy for CICC, which has long flirted with the idea of setting up a retail brokerage unit as its share of business has dwindled, but has so far remained wedded to its institutional clients.

“If you look at CICC’s business model, it has a very strong institutional focus, but we all know China’s capital markets are primarily driven by retail investors,” said Benjamin Quinlan, chief executive officer and managing partner at Quinlan & Associates. “CIS has a strong retail franchise, so it seems to complement CICC’s existing business quite well.”

CICC made its reputation bringing some of China’s biggest state-owned enterprises and red chips to the equity and debt markets. This included the US$21.9bn IPO of Industrial and Commercial Bank of China in 2006 and the US$22bn IPO of Agricultural Bank of China four years later.

After being ranked the number one brokerage firm in China in 2010, it fell to number 23 last year, according to Securities Association of China data, as the flow of giant SOE listings dried up and other Chinese securities firms expanded rapidly, using their stronger capital bases and wider branch networks to build intermediary businesses, especially around margin trading.

Bi Mingjian, appointed CEO of CICC last December, has made expanding the bank’s brokerage and asset management units a key part of his overall strategy and has sought to reduce reliance on institutional and wealthy clients.

CICC has only 20 branches in the PRC versus the 200 of CIS, according to its website. CICC’s small retail footprint has affected its earning capacity from retail investors, who account for most of the trading in the onshore capital markets.

“CICC was originally founded to be China’s one ready-for-Wall Street, global investment bank, but that strategy is no longer perfectly aligned with the profits and priorities of China’s banking industry,” said Peter Fuhrman, chairman and CEO at China First Capital.

“Instead of trying to compete with Goldman Sachs and Morgan Stanley, CICC will now be matched against a group of domestic competitors. This is ideal as investment banking fees within China, both for IPOs and the secondary market, are high and not that troublesome to earn.”

ADVISORY BUSINESS

Most analysts consider the acquisition, at around 1.1 times forward book value, as good value and a good strategic fit that should help propel CICC up the league tables.

“If you aggregate the market share of both firms across the equity and debt capital markets and M&A advisory, the combined entity could come out as number one in all three rankings,” said Quinlan.

“This might not be the case, but we expect CICC to be at least a top-five player in ECM and DCM, following the acquisition, and most probably top three for M&A advisory.”

The proposed acquisition will boost CICC’s balance sheet. CICC ranked 24 in terms of total assets in 2015 with Rmb63bn, while CIS was 18th with Rmb92bn. Their ranking would advance to 13 after the integration, still far short of the industry leader Citic Securities with total assets of Rmb484bn.

CICC ranked 23 among China’s 125 securities firms in 2015 in revenue terms, while CIS ranked 17, according to the Securities Association of China.

Some questions have been raised about the potential cultural mismatch between the two firms and there have also been suggestions that the Chinese government may be directing the acquisition as it seeks to improve the sector’s reputation for probity.

China’s securities sector has expanded at a considerable pace in the last few years with the combined asset base of the 125 securities companies operating there increasing fourfold between 2011 and 2015 to Rmb6.4trn and there are few signs that the pace of growth is likely to abate.

“It could be a win-win situation for the two firms, because their business models are very complementary,” said an analyst.

“However, it is also a big challenge for CICC on whether it can generate the synergies it expects, by applying its strengths in high-end services to the huge customer base and network of CIS,” said the analyst.

Following the acquisition, CIS will become a wholly owned subsidiary of CICC, while Huijin’s stake in CICC will increase to 58.7% from 28.6%.

CICC and ABC International are financial advisers for the transaction. The deal requires approval from shareholders and regulators.

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The Big Sort — The Economist

Leave a Comment / August 11, 2020

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“THE vultures all start circling, they’re whispering, ‘You’re out of time’…but I still rise!” Those lyrics, from a song by Katy Perry, an American pop star, sounded often at Hillary Clinton’s campaign rallies but will shortly ring out over a less serious event: a late-night party in Shenzhen to kick off “Singles’ Day”, an online shopping extravaganza that takes place in China on November 11th every year.

The event was not dreamt up by Alibaba, but the e-commerce giant dominates it. Shoppers spent $14.3bn through its portals during last year’s event. That figure, a rise of 60% on a year earlier, was over double the sales racked up on America’s two main retail dates, Black Friday and Cyber Monday, put together. Chinese consumers are still confident, so sales on this Singles’ Day should again break records.

It points to an intriguing question: how will all of those purchases get to consumers? Around 540m delivery orders were generated during the 24-hour spree last year. That is nearly ten times the average daily volume, but even a slow shopping day in China generates an enormous number. By the reckoning of the State Post Bureau, 21bn parcels were delivered during the first three quarters of this year.

The country’s express-delivery sector, accordingly, is doing well. In spite of a cooling economy, revenues rose by 43% year on year in the first eight months of 2016, to 234bn yuan ($36bn). And although the state’s grip on China’s economy is tightening, the private sector’s share of this market is actually growing. The state-run postal carrier once had a monopoly on all post and parcels. Now far more parcels are delivered than letters, and the share of the market that is commanded by the country’s private express-delivery firms far exceeds that of Express Mail Service, the state-owned courier.

China’s very biggest couriers have been rushing to go public on the back of the strong growth. Most of them started life as scrappy startups, and are privately held. But because of regulatory delays, which mean a big backlog of initial public offerings, many companies have resorted to other means. Last month, two of them, YTO Express and STO Express, used “reverse mergers”, in which a private company goes public by combining with a listed shell company, to list on local exchanges. In what looks to be the largest public flotation in America so far this year, another, ZTO Express, raised $1.4bn in New York on October 27th. Yet another, SF Express, China’s biggest courier, recently won approval to use a reverse merger too.

But investors could be in for a rocky ride. Shares in ZTO, for example, have plunged sharply since its flotation. That is because the breakneck growth of courier companies masks structural problems. For now, the industry is highly fragmented, with some 8,000 domestic competitors, and it is inefficient.

One reason is that regulation, inspired by a sort of regional protectionism, obliges delivery firms to maintain multiple local licences and offices. Cargoes are unpacked and repacked numerous times as they cross the country to satisfy local regulations. Firms therefore find it hard to build up national networks with scale and pricing power. All the competition has led to prices falling by over a third since 2011. The average freight rate for two-day ground delivery between distant cities in America is roughly $15 per kg, whereas in China it is a measly 60 cents, according to research by Peter Fuhrman of China First Capital, an advisory firm.

A handful of the biggest companies now aim to modernise the industry. Some are spending on advanced technology: SF Express’s new package-handling hub in Shanghai is thought to have greatly increased efficiency by replacing labour with expensive European sorting equipment. A semi-automated warehouse in nearby Suzhou run by Alog, a smaller courier in which Alibaba has a stake, seems behind by comparison but in fact Alog is a partner in Alibaba’s logistics coalition, which is known as Cainiao. The e-commerce firm has helped member companies to co-ordinate routes and to improve efficiency through big data.

Other investments are also under way. Yu Weijiao, the chairman of YTO, recalls visiting FedEx, a giant American courier, in Memphis at its so-called “aerotropolis” (an urban centre around an airport) in 2007. He was awed by the firm’s embrace of advanced technology. He returned to China and sought advice from IBM on how his company could follow suit. YTO is using the proceeds of its recent reverse merger to expand its fleet of aircraft, buy automatic parcel-sorting kit and introduce heavy-logistics capabilities for packages over 50kg.

There is as yet little sign that China’s regions will begin allowing packages to move freely, so regulation will remain a brake on the industry. More ominously, labour costs are rising. There are fewer migrant labourers today who are willing to work for a pittance delivering parcels. This week China Daily, a state-owned newspaper, reported that ahead of Singles’ Day, courier firms were offering salaries on the level of university graduates.

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http://www.economist.com/news/business/21710004-chinas-express-delivery-sector-needs-consolidation-and-modernisation-big-sort

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China Inc.’s Investment Bank Dives Into Troubled Retail Market — Bloomberg

Leave a Comment / August 11, 2020

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China International Capital Corp., the investment bank ex-Premier Zhu Rongji set up two decades ago to help restructure the Chinese economy, is again taking on a role that fits with the government’s agenda.

CICC’s $2.5 billion acquisition of China Investment Securities Corp. will plunge the firm into the retail investor market, a segment it had long shunned because of thin margins and a traditional focus on institutional clients. The deal is part of Chief Executive Officer Bi Mingjian’s push to lessen dependence on volatile investment banking fees.

Yet the transaction also ties in with a key objective of the government, which will become CICC’s largest shareholder as a result of the purchase. Having used CICC to take some of the largest state companies public since the late 1990s, China is now looking for assistance in its quest to reform a retail-driven equities market that’s prone to speculative booms and busts.

In the wake of the latest such episode, a stock market meltdown last year, the government launched an unprecedented crackdown on the securities industry and arrested several high-ranking executives.

“CICC will once again play this civilizing and globalizing role, only with the more far-reaching aim of helping to professionalize the often-shambolic Chinese stock market,” said Peter Fuhrman, chairman of China First Capital, a Shenzhen-based advisory firm. “Its reputation is still unsullied in China, unlike other banks whose leaders have been marched out in handcuffs and whose market practices are widely blamed for the rampant speculative fever that often afflicts China’s domestic capital markets.”

Reforming Role

In announcing the takeover on Friday, CICC hinted at a reforming role by saying the two firms will “work together to improve the quality and efficiency of mass market services” through training and by upgrading technology systems at China Investment Securities’ 192 branches across the country that serve retail clients.

CICC is buying China Investment Securities from state-owned Central Huijin Investment Ltd. It will issue shares to Central Huijin, more than doubling the entity’s stake in CICC to 58.7 percent. CICC had to get a waiver from the Hong Kong Stock Exchange for the transaction, so that Central Huijin’s controlling stake wouldn’t be classified as a reverse takeover.

An additional rationale for the deal is Huijin’s push to consolidate the securities industry by combining institutional and retail brokerage businesses, said Zhang Chunxin, an analyst at CMB International Capital Holdings Corp. She cautioned that “the reform process will be long and gradual.”

China Investment Securities ranked 17th among Chinese securities firms by revenue last year, while CICC was 23rd, according to official data. Bi’s overhaul has the support of the firm’s foreign shareholders, who had already been pushing CICC to diversify into areas such as asset and wealth management, a person with knowledge of the matter said.

Sherry Tan, spokeswoman at CICC, declined to comment.

Shareholder Backing

The combined stakes of CICC’s main foreign backers — private equity firms TPG Capital and KKR & Co., and Singapore sovereign wealth fund GIC Pte — will drop to 15.3 percent as a result of the takeover. However, the foreign firms may buy additional stakes from Central Huijin in future, people familiar with the matter said.

When former premier Zhu Rongji created CICC in 1995, China was launching a shakeup of its state-run industrial sector, leading to the closure of some 60,000 firms and loss of 40 million jobs. Since then, CICC has worked on some of the biggest listings of state enterprises, such as China Construction Bank Corp. and China Mobile Ltd. It was the top adviser on mergers involving Chinese companies in 2014, 2015 and so far this year.

Buying China Investment Securities is a departure from former CEO Levin Zhu’s strategy. The son of the former premier, who ran the firm until two years ago, had long resisted expanding into retail broking, fearing it would erode margins and its differentiation from other Chinese securities firms, according to people familiar with the matter.

Last year’s leverage-fueled equities rally and the subsequent implosion brought worldwide attention to the shortcomings of China’s markets. The government responded with an effort that included enlisting securities firms in supporting the stock market as well as jailing senior brokerage executives for alleged wrongdoing. CICC wasn’t among the firms that took part in the stock-market rescue, but China Investment Securities was.

Market Manias

China’s 114 million individual investors account for the bulk of equities trading. That makes them a hard-to-ignore segment, but also one that tends to be susceptible to market manias. Critics contend that the government’s efforts to restore market calm last year only served to hurt investor confidence further.

The Shanghai Composite Index remains 39 percent below its June 2015 peak. Xiao Gang, who was removed from his post as chairman of China’s securities regulator this year, in January acknowledged loopholes and ineptitude within the regulatory system.

Some analysts aren’t convinced the deal is in CICC’s best interest. The stock fell 2.1 percent on Monday after a trading halt was lifted.

The transaction makes the firm “more like a state-owned company, which could compromise CICC’s corporate governance, operational autonomy” and its ability to retain top talent, said Fred Hu, Goldman Sachs Group Inc.’s former Greater China chairman.

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http://www.bloomberg.com/news/articles/2016-11-07/china-inc-s-investment-bank-dives-into-troubled-retail-market

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Has Yum Worked Out How Fast-Food Firms Can Crack China? — Bloomberg

Leave a Comment / August 11, 2020

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Global consumer companies trying to find a business model for China’s burgeoning domestic market will be watching closely as one of the oldest Western brands in the country starts a new strategy.

Yum! Brands Inc., which opened its first KFC restaurant in China in 1987 and also operates Pizza Hut outlets, has been losing market share thanks to a food-safety scare, changing tastes, increasing local competition and a host of other challenges that foreign companies face in China. It carved out its China operations into a separate company, Yum China Holdings Inc., which begins trading today in New York.

Ring-fencing the business, the largest independent restaurant company in China with 7,000 outlets and more than $900 million cash on hand, offers Yum a number of advantages in dealing with a fast-changing market. Yum’s example could provide a road map for other global consumer brands in the world’s most populous nation.

Yum China has issued 386 million shares at $24.36, which puts its valuation at around $9 billion, according to New Jersey-based research firm Edge Consulting Group LLC. The stock rose about 2 percent to $24.85 as of 9:59 a.m. in New York, while Yum Brands gained 0.7 percent to $62.49.

“When their China operations get so big and are clearly catering just to the China market, splitting off could unlock a lot of value for shareholders,” said Shaun Rein, Shanghai-based managing director of China Market Research Group. “If I were an activist hedge fund investor, I would be looking at carving out brands within large conglomerates that are China plays.”

Doing so allows Yum’s management of the China business to tailor its operations and products more swiftly to changing local conditions, such as the menu preferences of diners in different parts of the country, mobile-based payments systems, hiring and other factors.

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It also helps tap Chinese investors willing to pay high premiums for a stake of an international brand’s China operations. Yum sold a combined $460 million stake in its Chinese business to Primavera Capital Group and an Alibaba Group Holding Ltd. affiliate, Ant Financial Services Group, in September.

In recent years, Yum has ceded market share to local competitors because it was slow to react to market changes, said Rein.

“They didn’t make corporate decisions quickly enough, such as in adopting mobile payments, or adapting to consumers wanting more premium offerings,” Rein said. “Their ability to deal with the more complex environment here was held back by the lack of knowledge, the slowness of the U.S.”

Localization of offerings at KFC and Pizza Hut outlets in China will be an important component of the firm’s strategy for the country, Yum China Chief Executive Officer Micky Pant said at a briefing Tuesday in Shanghai. The company plans to increase investment in new outlets across its brands and does not plan to raise more capital, he said.

An activist hedge fund investor upset with the company’s handling of its China business is how Yum China came into being.

After a food-safety scandal in 2014 and cheaper local competition torpedoed Yum’s sales and profit in China, Corvex Management founder Keith Meister in mid-2015 urged the company to split off its Chinese operations — which contribute about half the group sales — saying that the move could generate an additional $16 a share in value for the Louisville, Kentucky-based company.

Yum’s total share of China’s market for fast-food chains dropped to 30 percent last year, from 40 percent in 2012, according to data from Euromonitor International. While sales have been growing again in China in the mid-single digits since late last year, the company has suffered from consumers shifting to healthier options and domestic chains sprouting up with more variety.


Volatility Reduction

Unlike Yum’s U.S. operations, where most of its restaurants are run by franchisees, Yum China directly operates over 90 percent of its outlets and plans to triple the number to more than 20,000 in the long term.

Yum’s spinoff would reduce volatility for its remaining business, while “giving investors with a higher risk tolerance access to a more pure-play China growth story,” said Jonathan Morgan, an analyst for Edge Consulting. “China’s economic slowdown could induce other U.S.-listed restaurant stocks to spin off their China businesses, to protect their core businesses.”

So far, companies with China consumer arms have often chosen instead to sell the division to a local competitor and take a stake in that business instead.

Wal-Mart Stores Inc. in June sold its e-commerce platform Yihaodian to China’s second-largest e-commerce company, JD.com Inc., for a 5 percent stake in JD. In August, Uber Technologies Inc. surrendered after a year-and-a-half battle with Didi Chuxing and agreed to sell its business in China. It departed the country in exchange for $1 billion in cash and a 17.7 percent stake in Didi.

McDonald’s Corp., meanwhile, is seeking to sell its 20-year mass franchise rights for China and Hong Kong for a reported $2 billion.

Starbucks Corp. is the only other major U.S.-listed food and beverage chain in China beside Yum, which owns and operates its outlets, numbering 2,400 stores across 110 cities.

China, Starbucks’ largest international market, represents the most significant opportunity for the company, said a company representative. The company has no intention to change its operation model in the market, according to the spokesperson.

Jackpot Valuations

“What we’ve seen across various industries is that foreign players eventually pull out or find a local partner,” said Hong Kong-based S&P Global Ratings’ restaurant and retail analyst Shalynn Teo. “It’s the local market knowledge and local relationships that determine which foreign businesses survive in China, and local players will always have an edge.”

With Chinese investors paying a premium for market share, such deals can prove attractive, said Peter Fuhrman, CEO of Shenzhen-based investment bank and advisory firm China First Capital. “As long as Chinese investors are offering jackpot valuations,

Those that don’t face the need to tailor their businesses to China’s widely diverse and morphing consumer market. Only from March this year did KFCs in China began accepting WeChat Pay; they started accepting Alipay mobile payments in July last year. Yet the country leads the world in the use of such transactions, with four out of 10 Chinese consumers using mobile payments at physical stores, research firm EMarketer estimated.

Starbucks stores in China still do not accept Alipay or WeChat, only Apple Pay, a decision which costs them 5 to 10 percent of sales, estimates China Market Research Group’s Rein.

Starbucks launched its own mobile payment system in China in July, allowing customers to pay with preloaded Starbucks Gift Cards via their mobile devices, according to the company.

As China’s consumer market continues to grow, more overseas companies may consider following Yum down the path of segregation.

“Four out of 10 spinoffs do not generate a return in the first year of separation,” said Edge Consulting’s Morgan. “How Yum China performs will help U.S.-listed companies evaluate their strategic options in China.”

 

http://www.bloomberg.com/news/articles/2016-10-31/yum-s-spinoff-offers-roadmap-for-western-brands-in-china-market

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PAG Said to Pay About $250 Million for Chinese School Operator — Bloomberg

Leave a Comment / August 12, 2020

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By Cathy Chan

(Bloomberg) — PAG Asia Capital has paid about $250 million for Golden Apple Education Group, a Chinese company that’s been embroiled in legal action brought by creditors of its former owner, according to people familiar with the matter.

The Hong Kong-based private equity firm acquired Golden Apple from Sichuan Harmony Group, a Chengdu-based property developer, the people said, requesting anonymity because the details of the transaction are private. Golden Apple became involved in legal cases brought since 2014 by Sichuan Harmony’s creditors because it guaranteed some of the property developer’s loans, the people added.

The sale of Golden Apple helped resolve legal claims from about 60 individuals and money lenders, some of which had foreclosed on Sichuan Harmony assets, according to an official at Sichuan Financial Assets Exchange, the state-backed entity which was appointed to lead the Sichuan Harmony debt restructuring together with PAG.

“It’s highly unusual for a foreign private equity firm to buy a Chinese company undergoing court-supervised administration,” said Peter Fuhrman, the chairman of China First Capital, a Shenzhen-based investment banking and advisory firm.

The unwillingness of many Chinese creditors to write off part of their loans, a concession needed to restructure debt and give a company a new start, makes such deals “worlds away both in complexity and investment appeal” from other private equity transactions, Fuhrman said.

 One-Child Policy

A spokesman for PAG declined to comment. A spokeswoman for Golden Apple referred to an Aug. 25 media interview posted on the company’s website which said it is partnering with PAG and plans to invest 2 billion yuan ($295 million) in its facilities over the next two to three years. She declined to comment further on the PAG acquisition or on the company’s legal issues.

PAG, co-founded by former TPG Capital veteran Shan Weijian, is buying Golden Apple partly because China’s move to repeal its decades-old one-child policy has bolstered the prospects of the education industry, according to the people. The Chinese government has estimated that the change is likely to add three million newborns each year. Investors have taken note, with venture capital companies conducting 10 fundraising rounds in the first half for startups in the maternity and pediatric market, according to VC Beat Research, which tracks internet health-related investment and fundraising.

   Kindergartens

Golden Apple operates 33 kindergartens and two primary schools, mostly based in Chengdu, with more than 12,000 students, the people said. PAG plans to expand the number of primary schools and develop secondary schooling after acquiring the business, according to the people.

Sichuan Harmony has reduced its outstanding loans from state-backed lenders from 2.5 billion yuan to 1.9 billion yuan, according to the Sichuan Financial Exchange official, who asked not to be identified by name. The company has 4.5 billion yuan of assets and will focus on its medical and community nursing- home businesses, the official added.

The market for online education services in China has also attracted overseas interest. KKR & Co. last year agreed to invest $70 million in Tarena International Inc., which offers in-person and online classes in information technology, marketing and accounting. GIC Pte and Goldman Sachs Group Inc.

were among investors putting $200 million into TutorGroup, a Chinese online education platform, in its third round of financing in November. CVC Capital Partners in May sold its stake in Education International Corp., China’s biggest overseas educational counselling service provider, to a consortium led by Chinese private equity fund NLD Investment LLP.

 

ZTO Spurns Huge China Valuations For Benefits of U.S. Listing — Reuters

Leave a Comment / August 12, 2020

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By Elzio Barreto and Julie Zhu | HONG KONG

Chinese logistics company ZTO Express is turning up the chance of a much more lucrative share listing at home in favor of an overseas IPO that lets its founder retain control and its investors cash out more easily.

To steal a march on its rivals in the world’s largest express delivery market, it is taking the quicker U.S. route to raise $1.3 billion for new warehouses and long-haul trucks to ride breakneck growth fueled by China’s e-commerce boom.

Its competitors SF Express, YTO Express, STO Express and Yunda Express all unveiled plans several months ago for backdoor listings in Shenzhen and Shanghai, but ZTO’s head start could prove crucial, analysts and investors said.

“ZTO will have a clear, certain route to raise additional capital via U.S. markets, which their competitors, assuming they all end up quoted in China, will not,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital.

With a backlog of about 800 companies waiting for approval to go public in China and frequent changes to the listing rules by regulators, a New York listing is generally a quicker and more predictable way of raising funds and taps a broader mix of investors, bankers and investors said.

“ZTO will have a built-in long-term competitive advantage – more reliable access to equity capital,” Fuhrman added.

U.S. rules that allow founder Meisong Lai to retain control over the company and make it easier for ZTO’s private equity investors to sell their shares were some of the main reasons to go for an overseas listing, according to four people close to the company. U.S. markets allow a dual-class share structure that will give Lai 80 percent voting power in the company, even though he will only hold 28 percent of the stock after the IPO.

Most of Lai’s shares are Class B ordinary shares carrying 10 votes, while Class A shares, including the new U.S. shares, have one vote. China’s markets do not allow shares with different voting power.

ZTO’s existing shareholders, including private equity firms Warburg Pincus, Hillhouse Capital and venture capital firm Sequoia Capital will also get much more leeway and flexibility to exit their investment under U.S. market rules. In China, they would be locked in for one to three years after the IPO.

As concerns grow about a weakening Chinese currency, the New York IPO also gives it more stable dollar-denominated shares it can use for international acquisitions, the people close to the company said.

IN DEMAND

Demand for the IPO, the biggest by a Chinese company in the United States since e-commerce giant Alibaba Group’s $25 billion record in 2014, already exceeds the shares on offer multiple times, two of the people said.

That underscores the appeal of the fast-growing company to global investors, despite a valuation that places it above household names United Parcel Service Inc and FedEx Corp.

The shares will be priced on Oct. 26 and start trading the following day.

ZTO is selling 72.1 million new American Depositary Shares (ADS), equivalent to about 10 percent of its outstanding stock, in the range $16.50 to $18.50 each. The range is equal to 23.4-26.3 times its expected 2017 earnings per share, according to people familiar with the matter.

By comparison, Chinese rivals SF Express, YTO Express, STO Express and Yunda shares trade between 43 and 106 times earnings, according to Haitong Securities estimates.

UPS and FedEx, which are growing at a much slower pace, trade at multiples of 17.8 and 13.4 times.

“The A-share market (in China) does give you a higher valuation, but the U.S. market can help improve your transparency and corporate governance,” said one of the people close to ZTO. “Becoming a New York-listed company will also benefit the company in the long-term if it plans to conduct M&A overseas and seek more capital from the international market.”

China’s express delivery firms handled 20.7 billion parcels in 2015, shifting 1.5 times the volume in the United States, according to consulting firm iResearch data cited in the ZTO prospectus.

The market will grow an average 23.7 percent a year through 2020 and reach 60 billion parcels, iResearch forecasts.

Domestic rivals STO Express and YTO Express have unveiled plans to go public with reverse takeovers worth $2.5 billion and $2.6 billion, while the country’s biggest player, SF Express, is working on a $6.4 billion deal and Yunda Express on a $2.7 billion listing.

ZTO plans to use $720 million of the IPO proceeds to purchase land and invest in new facilities to expand its packaged sorting capacity, according to the listing prospectus.

The rest will be used to expand its truck fleet, invest in new technology and for potential acquisitions.

“It’s a competitive industry and you do need fresh capital for your expansion, in particular when all your rivals are doing so or plan to do so,” said one of the people close to the company.

http://www.reuters.com/article/us-zto-express-ipo-idUSKCN12L0QH

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Google Returns to China, As a Hardware Company — Financial Times

Leave a Comment / August 12, 2020

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The end is in sight for Google’s seven wilderness years in China. With none of the theatrics that accompanied its voluntary withdrawal from the country due to web-search censorship in January 2010, Google is now firmly on a path not only to return to China but also to potentially seize a spot alongside Apple as one of the most profitable tech companies there.

This is a likely outcome of Google’s announcement last week that it is entering with full force the global consumer hardware industry. Google Pixel mobile phones, Google Home artificial intelligence-enabled speakers, Google Daydream View virtual reality headsets, these will be the engines of Google’s revival in China. Based on what Google has so far revealed – including pricing – these products may find a large market among Chinese consumers.

The company has made no specific mention of plans to re-enter China. China’s government will not likely strew the ground with rose petals to welcome Google back.

Instead, Google can rely on China’s enormous grey market for electronics hardware to bring its products into China’s on-and-offline retail network. Hong Kong is usually the main transshipment point, not only because prices are lower than in the PRC, but the quality of hardware sold there is considered to be higher.

There is a precedent here. Apple took six years after the iPhone’s launch to ramp up its official sales channels in China by doing a deal with the main carrier, China Mobile. By that point, an estimated 30m to 50m grey market iPhones were already in use in China.

Mobile phones running Google’s Android system already dominate the Chinese market, with about 300m sold this year. Most are sold unlocked without carrier subsidy. None can freely access Google search, storage or maps. The Google Pixel will likely have similar limitations.

But Pixel will have huge advantages no other Android phone can match of closely integrating the operating system and device hardware to optimise the performance of everything else on the phone.

All of China’s many Android brands will be impacted, but none more so than the current market leader, Huawei. It now dominates the high-end Android market in China, even more so with Samsung’s recent woes. The Pixel will be priced to compete directly with Huawei’s flagship models.

It is not only in its home market of China that Huawei may get battered. It has also set great store on becoming the world’s leading Android phone brand in Europe. That will certainly be far harder to achieve now.

As it happens, Google’s announcement came at a time when just about everyone at Huawei, along with everyone else in China, was enjoying a week-long national holiday. They return to their desks this week to find the tech world disrupted. No one quite predicted Google would amp up its hardware strategy to this level.

Google had toyed around before, selling small volumes of its outsourced Nexus-branded mobile phone to showcase more of Android’s features. Huawei was one of the companies making Nexus phones. Google also bought in 2011 Motorola’s mobile phone business and unloaded it two-and-a-half years later to China’s Lenovo, a deal that has not worked out at all well for the Chinese company.

But, this time Google says it is not dabbling. It defines its future strategy as becoming, like Apple, a fully vertically-integrated hardware and software business, but one with the world’s most powerful system of proprietary voice and text-enabled artificial intelligence.

Google introduced three hardware products last week. More are certain to follow, including perhaps a mid-priced phone that will take aim squarely at China’s Xiaomi (among others), already reeling from falling sales and an inability to crack the more lucrative higher-end Android market.

Google’s advantages run so deep they can seem unfair. Not only does it own and develop the Android software its competitors except Apple rely on, it also already has one of the world’s best and most recognizable brands. Also worth noting, Google now has about $70bn in cash, mainly sitting outside the US, looking for new markets to conquer.

As for the other new Google hardware products – the home speaker and virtual reality (VR) headset – the market seems ripe for the taking. Despite billions of government dollars invested into Chinese companies working on machine-learning, artificial intelligence and VR, none has come to market in any significant way.

Even if they now do, none can match Google’s enormous breadth, capability and experience in human-machine dialogue.

Though a success in the US, Amazon’s Echo home speaker, which is capable of interacting with the human voice, is a non-entity in China. It does not understand spoken Chinese. Google, on the other hand, is quite adept at Chinese. While Google Maps, Gmail, Drive are all blocked in China, Google Translate is not.

Indeed, the Chinese government quietly stopped blocking it about a year ago. It’s the only one of Google’s major online offerings that can be readily accessed in China. The reason: Google Translate has become an essential tool for Chinese companies active internationally, as well as for many of the 150m middle class Chinese now vacationing abroad each year.

If Sundar Pichai, Google’s CEO, is correct, the world including China is moving from a “mobile-first to an AI-first world”. Google is already miles farther down this path than any Chinese company. It need not reestablish its search engine business in China to be a major force there.

As for China’s government, however it chooses to react to Google hardware products sweeping into China, its own aspirations to nurture globally-competitive indigenous tech companies probably just got a lot harder to achieve.

In the seven years since Google departed, China became in many areas even more of a tech Galapagos. Poised now to reenter China by the back door, Google should like the way the competitive landscape looks there.

If Google takes just 1 per cent of the China Android market – and my prediction is it will do markedly better – it will have $2bn of annual revenues in China, a business larger, more valuable and unassailable than when it pulled out.

Peter Fuhrman is Chairman & CEO of China First Capital, a boutique investment bank

 

As published in the Financial Times

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Can Xiaomi Reverse Its Slide in China? — CNBC Interview

Leave a Comment / September 28, 2016

 

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From King-of-Mobile to possible also-ran in two short years, China’s Xiaomi is struggling to reclaim its spot at the top of China’s domestic phone market. Here’s my interview on CNBC on the tough challenges Xiaomi faces. Nerves are starting to fray among investors who put money into the company less than two years ago at a $45 billion valuation.

To watch the interview, please click here.

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Fresh Ideas For Making Money in China Private Equity and Venture Capital

Leave a Comment / August 12, 2020

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2016 is looking like it may be another year to forget for PE and VC in China.  The problem, as always, is with exits. For years, IPOs in China for PE-backed deals have been too few and far between.  There was initially a lot of  hope for improvement this year. But, prospects unexpectedly turned bleak when the Chinese securities regulator, the CSRC, suddenly reversed course. Not only did they put on hold previously-announced plans to liberalize IPOs by opening a new “strategic board” in Shanghai and to shift to a registration-based IPO system, they also began clamping down hard on the two main exit alternatives, backdoor shell listings and trade sales to Chinese listed companies.

IPO multiples remain sky-high in China. The IPO queue sits at 830 companies, with at least another 700 now lined up to get provincial approval to join the main waiting list. The CSRC did finally announce one liberalization of the IPO regime in China, but it will likely be of little help to the hundreds of PE and VC firms with thousands of unexited deals. Companies based in China’s poorest, most backward areas, the CSRC announced earlier this month, will now get to jump to the head of the queue.

Not for the first time, it looks like PE and VC portfolios may be mismatched with IPO regulatory policy in China. PE and VC firms have of late invested overwhelmingly in two areas. First is healthcare. The industry in China is growing and reforming. But, entry valuations have been bid up to astronomical levels.

In terms of number of deals closed, Chinese tech startups are getting the lion’s share of the attention. China’s online and smartphone population as well as e-commerce industry, after all, are the world’s largest. What’s missing at most of the funded startups are profits or a high-probability path to making money one day soon. Many are using PE money as part of a “last man standing” strategy to win customers by subsidizing purchases. Loss-making companies are still barred from having an IPO in China.

The main building blocks of China’s corporate sector, manufacturing companies and bricks-and-mortar businesses, are both highly out of favor with PE firms.

Amid so much misfortune, where should the PE and VC industry look next to invest profitably in China? What seems most clear is that any strategy linked to short-term IPO exit-chasing, or seeking to intuit the next flux in CSRC policy, has proved fundamentally risky. Some fresh approaches may be in order.

One priority should be on backing companies that can deliver sustainably high margins and positive cash flow over time to support regular dividend payments. Invest more for yield and less for capital gains.

There are such investment opportunities in China. I want to share six here. There are certainly many others. Looking outside the current China PE investment mainstream has other pluses. A troubling term has entered the Chinese financial vocabulary in the last two years, called “2VC”. It means a Chinese company started and run primarily for the purpose of attracting PE and VC money and less about making money from customers. 2VC deserves a detailed analysis of its own, how much it may be warping the investment landscape in China.

GPs and LPs looking for durable margins, scaleability, and a dearth of competition in China could start their search here:

  1. Robotics gearbox. China’s robot industry is hot. By now, about everyone has read the stories suggesting China’s robotics market, already the largest in the world, will boom for decades to come. For now, the investment money in China has gone overwhelmingly into companies that are making simple robots, rather than the robot industry supply chain. This overlooks perhaps the best opportunity of all. Robots rely on sophisticated gearboxes to make parts move. Making and selling gearboxes, rather than the final robot, is where the big margins and demand are. The technology has been around for a while, but the industry is dominated by two big foreign manufacturers, ABB of Switzerland and Rexnord of the US. They make a ton doing it. A Chinese robotics gearbox maker, assuming they get the product right, could immediately roll up sales in the hundreds of millions of dollars, both to Chinese robot makers as well as US, European and Japanese ones. From conversations I’ve had with C Level execs at both ABB and Rexnord, this is the Chinese competition they fear most, but which to their surprise has yet to materialize.  —————————————————————————–
  2. Hospice and specialized late stage care. PE investment in healthcare, especially into biosimilar pharma companies, hospitals and clinics for plastic surgery and dental care has been abundant, averaging well over a billion dollars a year in China. Competition is rampant in all these areas. Late stage critical care, however, has largely gone unfunded. The unmet need in China is almost unfathomably large. There are basically no hospices in China, though some 10 million Chinese die every year, including a surging number from cancers and long-term chronic diseases. There are also 30 million Chinese with Alzheimers and virtually no places offering specialized care. The number of Alzheimers sufferers is rising fast as Chinese longevity surges. Make no mistake, it’s harder to provide this kind of medical care than to do Botox injections. But, anywhere money is easily made in China, it’s getting harder to make any money at all. The biggest provider of specialized high-end late stage care in China is the French company, Orpea. They are doing a great job. I’ve had a close look at their business in China. They too are awed by the scale of the untapped market in China. A big plus: pricing freedom. The business doesn’t rely, as most conventional hospitals and drug companies in China do, on state reimbursement. —————————————————————————————————————————
  3. Dog food and other pet items. When I first came to China in 1981, it was basically illegal to keep a dog or cat as a pet. There was barely enough food to feed the human population and food was rationed. To say the growth in pet ownership since then has been explosive would risk understating things. China is now the third largest dog-owning market globally, with 27.4 million dogs (behind the US with 55.3 million dogs and Brazil with 35.7 million), and the second largest cat-owning country with 58.1 million cats, behind only the US with 80.6 million. China’s pet market will soon blow past that of the US. Everywhere this is presenting great opportunities in pet care, pet food, pet hotels. The US pet food giant Mars has a large chunk of the dog food market here. But, there are still many opportunities to carve out a niche in pet food, both via sales at veterinary clinics and online. The other vast uncharted market: pet insurance.   ——————————————————————————————–
  4. Server storage. Chinese law mandates that the country now has and will continue to have the largest ongoing demand for high-end servers, as well as the software that powers them. The reason: all the major sources of online traffic — Alibaba, Tencent, JD.com, Baidu — must permanently store virtually everything that runs across their network. In the case of Tencent’s Wechat business, that means keeping billions of text, audio, video and photo messages generated every day by its 600 million users. Tencent’s ongoing investment in servers is almost certainly larger than any other company in the world, with the other big Chinese internet companies following closely behind. The growth rate is dizzying. This has created a wonderful profit-center for otherwise troubled chip giant Intel. Its Xeon chips power virtually all high-end servers. No single domestic company has yet emerged to build a sizeable business in storage software, maintenance and integration tailored to the regulatory needs in China. In parallel, there’s also a large market for similar made-at-home software solutions to sell to the Chinese government. They are the reason all this server storage demand exists.   ————————————————————————————————————————————————
  5. Mall-based attractions. Shopping malls in China are in a fight for survival. Clothing retailers, which just two to three years ago took at least half the floor space in Chinese malls, are disappearing. They can’t compete with online merchants offering the same products for one-third to one-half less. The going has proved especially hard for Chinese domestic retail brands, quite a few got PE money back when this sector was hot. Chinese malls need to change, and fast. Their main strategy so far is increasing the floor space allocated to restaurants and movie theaters. Another area with huge potential, but so far little concrete activity, is “edu-tainment” attractions. A prime example is a mall-based aquarium. I was recently shown around one-such mall aquarium in a major Chinese city by its owners, a large Chinese real estate developer. Though they initially knew nothing about aquariums, their design and selection of fish are mediocre, the owner is coining money with over 45% margins. Tickets sell days in advance, not just on weekends, for average of $15 for adults and less for kids. It’s been open and thriving for three years. Every mall they are building now will have a similar attraction. A better operator should be able to push margins higher and roll out nationwide. On average, 55 million Chinese go to the mall each week. —————————————————————————–
  6. Indoor LED vegetable growing.  China has a big appetite for vegetables, about 100 kilos per person per year, or seventy billion tons. Many Chinese, especially the 55% living in cities, have concerns about where and how the vegetables are grown and how they get to market. The worry rises in lock step with per capita income.  Catering to worried Chinese consumers could keep a company in profit for decades. One good idea that’s not yet in China but should be: growing vegetables indoors, using LED lights.The cost of LED lighting has fallen by over 90% since 2010 and will continue to decline, thanks in large part to over-investment in this sector in China. LED efficiency has also nearly doubled over that time. It now costs about the same to grow vegetables indoors with LEDs as it does in well-irrigated farmland. Supplying vegetables to urban China this way has a lot of other advantages, including the ability to provide a secure chain of custody, from the place where the food is picked all the way to the customer’s hands. Lots of models would work in China — large growing areas inside abandoned urban factories to supply better Chinese supermarket chains like Walmart, Carrefour and China Resources, or smaller-scale packages home-delivered or sold through vending machines placed inside high-end residential complexes in China. Organic or non-organic, catering to Chinese picky consumers could keep a company in profit for decades.

Since PE first took off in China in 2005,  China’s economy has grown by almost four-fold. Few GPs in China have done as well in DPI terms. It’s likely not going to get any easier to make or raise money, nor to rack up IPO exits. More than ever, PE firms need to back or incubate ideas to catch and hold some of the new wealth that’s getting created every day in China.

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As published by SuperReturn

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Quietly But Successfully, US Companies Are Buying Chinese Businesses

1 Comment / August 12, 2020

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--FILE--RMB (renminbi) yuan and US dollar bills are pictured at a bank in Huaibei city, east Chinas Anhui province, 16 September 2011. Chinas yuan edged down versus the dollar on Tuesday (11 October 2011), consolidating its biggest single-day gain a day earlier, brushing aside a record central bank mid-point as US lawmakers prepare to vote on a bill aimed at punishing Beijing for alleged currency manipulation. The Peoples Bank of China, the countrys central bank, set the yuan central parity rate at 6.3483 against the dollar, compared with 6.3586 on Monday.

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Is China really buying up America? Or is it the opposite?

Chinese investments in the US draw lots of headlines and occasional handwringing about China’s growing influence and ownership. It is true that Chinese investors, especially SOE, have been throwing billions of dollars around, mostly for US real estate.

Far more quietly, and perhaps with better overall results, US investors have been buying businesses in China. The US acquirers do their utmost to stay out of the headlines. They prefer to shop quietly, without competitors finding out. This does a lot to keep prices down and give these US buyers maximum negotiating leverage. A lot of these US acquisitions in China stay secret long after they close.

Contrast this style with that of Chinese investors in the US. Most end up bidding against one another for the same assets. Overpaying has become a hallmark of Chinese purchases in the US.

Compared to the huge number of Chinese companies shopping for assets in the US, not nearly as many US companies are sizing up deals and kicking tires in China. Partly this stems from some misunderstandings among less-experienced US acquirers about what kinds of Chinese businesses can be targeted. Topping the list of sweeping generalizations: Chinese companies, especially privately-owned ones, are said to have owners who rarely wish to sell. Those that do, want to sell their deeply troubled companies at Neiman Marcus prices.

There is some truth to this arm-chair analysis. But, equally, there are good deals being done. I’ve written before about the most successful US acquisition in China, by food giant General Mills. (Click here to read.) It’s a textbook case of how to do M&A in China and also how to build a billion dollar business there without anyone really noticing.

Why buy rather than build in China? For one thing, China has huge and fast-growing markets in almost all industries except the smoke-stack ones. For buyers that choose and execute well, the China market is proving lucrative ground to do M&A. It’s a truth that remains a known to a select group of smart buyers.

Lifting the veil a bit, here are some of the largely-unpublicized acquisitions done by smart American buyers in China.

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In April 2015, 3D Systems, a New York Stock Exchange-quoted manufacturer of 3D printers, purchased 65% of a Chinese 3D printing sales and service company Wuxi Easyway. The Chinese company’s customers in China include VW, Nissan, Philips, Omron, Black & Decker, Panasonic and Honeywell. 3D Systems has an option to purchase the remainder of the business within five years.

Along with acquiring a developed sales network and increased distribution in China, another key aspect of the deal was to make the founder of Easyway, a Western-educated Chinese, the CEO of a newly-formed subsidiary,  3D Systems China.  The plan is to make the Chinese founder the king of a larger kingdom, a carrot frequently dangled by American companies to persuade Chinese founders to sell to them.

Since the deal closed, 3D Systems also accelerated the build-out of its operational infrastructure in China. What lies behind the deal? 3D Systems acquired a local management team as well sales channels, customer relationships.  It did not acquire manufacturing capability.

3D Systems manufactures high-quality 3D printers that sells at significantly higher prices than Chinese domestic competitors. Owning a Chinese business with established customer relationships in China will make it easier for 3D Systems to penetrate more deeply what should become the world’s largest market for 3D printers. The shift is particularly strong among Chinese private sector manufacturing companies making products for China’s consumer market.

Prior to the acquisition, Easyway was not a major client or partner of 3D Systems. As the integration moves forward, Easyway will likely expand its product offerings in China beyond relatively commoditized business of producing 3D prototypes. 3D Systems’ printers have broader capabilities, including the production of end-use parts, molds for advanced tool production, medical and surgical supplies.

The dual-track strategy is for Easyway to maintain its existing comparatively low-end service business in China while adding two new sources of revenue: the sale of 3D Systems’ 3D printers in China and an enhanced/upgraded service business of using 3D Systems printers to produce higher-quality and more complex parts to order for Chinese customers.  Both should positively impact 3D Systems’ P&L.

3D Systems used a deal structure that often works well in China. They bought a majority of Easyway, while leaving the target company founder/owner with a 35% minority stake in an illiquid subsidiary of 3D Systems. 3D Systems has the option to buy out the remaining shares and assume 100% control. But, the option may never be exercised. 3D Systems now enjoys the benefits of holding corporate control, including consolidation, while also keeping the previous owner aligned and incentivized.

The deal isn’t without its risks, of course. 3D Systems previously had no corporate presence in China. It therefore did not have its own management team in place and on-the-ground in China to manage the integration of Easyway and monitor the business going forward.

illinois

In July 2013, Illinois Tool Works (“ITW”), a huge and hugely-successful US industrial conglomerate, purchased 100% of a Chinese kitchen supply manufacturer Gold Pattern Holdings, based in Guangzhou, from global private equity firm Actis.

The acquisition fits well with the expansion strategy of ITW of looking to make tuck-in acquisitions in their core business segments. ITW has a large food equipment business with over $2 billion in annual revenue, 15% of ITW’s total.  Gold Pattern’s business is selling Western-style kitchen equipment to restaurants and hotels in China.

From discussions we’ve had with ITW since the acquisition, the deal is considered a solid success within ITW. The company says it has a strengthened appetite to make more such acquisitions in China, a key market for the company going forward.

ITW owns some of the most well-known brands in the food equipment industry, including Hobart mixers and Vulcan ranges. Buying Gold Pattern was part of a strategy to increase sales and distribution of these ITW brands in the fast-growing China market. Gold Pattern’s own commercial kitchen equipment is lower-priced and generally considered lower-quality.  But, the domestic sales channels used to sell Gold Pattern’s equipment is also suitable to distribute ITW’s US brands.

ITW expects that as China continues to grow more affluent, the demand among the Chinese middle class for European and American food will expand significantly. This will create a long-term market opportunity for ITW to sell Western style commercial kitchen equipment. More and more four-and-five star hotels in China are being equipped with Western kitchens as well as Chinese ones.

ITW mitigated its deal risk by buying Gold Pattern from a well-regarded international PE fund. As a result, Gold Pattern already had fully-compliant GAAP accounting, established corporate governance structures, and a professional management team. No less important, ITW knew from the outset that Gold Pattern had already successfully undergone the forensic due diligence process that preceded Actis buying control of the company. This significantly lower due diligence risk, a prime reason many deals in China – both minority and control – fail to close.

ITW has significant experience buying and integrating businesses globally. They had operations in China for twenty years prior to this acquisition.  ITW and another diversified Midwestern industrial company, Dover Corporation, are both actively, but ever-so-quietly seeking more acquisitions in China, aimed primarily at expanding their sales and distribution in China’s growing domestic market.

 amazon

This deal happened a long time ago, but continues to pay dividends for Amazon. In August 2004, they bought 100% of Chinese e-commerce company Joyo, paying a total of $75mn including an earn-out.  At the time, e-commerce in China was in its infancy, while Amazon was less than one-tenth its current size. The purchase of Joyo was a calculated gamble that China’s online shopping industry, despite huge impediments at the time including no established online payment systems would eventually achieve meaningful scale.

The gamble has paid off handsomely for Amazon. The e-commerce industry in China is now at least 50X larger than in 2004, with revenues last year of over $700bn. E-commerce revenues are projected to double in China by 2020. Amazon is the only non-Chinese company with meaningful market share and revenues in this hot sector. That said, Amazon is dwarfed by Alibaba’s Taobao, which has a market share in China estimated at 75%.

But, Amazon in 2012 spotted an opportunity to use its China-based business to establish a highly-lucrative cross-border business facilitating direct export sales by Chinese manufacturers and individual traders on Amazon’s main US and UK websites.  This is a business Alibaba has tried and so far failed to enter.  As a result, Amazon’s senior management, if they know no one is listening, will tell you the Joyo acquisition is a big success. It generates meaningful revenue in China (approx. $3bn), while supporting the infrastructure to build out the cross-border exports.  Amazon continues to invest aggressively in China, with enormous warehouse facilities (800,000 total sqm) and wholly-owned logistics business.

When Amazon bought Joyo, it knew full well that Chinese law, as written, forbids foreign companies from owning a domestic internet company. The Chinese government views the internet and e-commerce as “strategic national industries”. At the time, Amazon got around this by using an ownership structure for its China business called a “Variable Interest Entity” (“VIE”) also used by some domestic Chinese e-commerce companies that listed on the US stock market. The Chinese government, if they chose to, could probably shut Amazon down in China, because it’s using this loophole to operate in China. That could leave Amazon scrambling to find a way to stay in business in a country in which it now has hundreds of millions of dollars in assets.

The boards of many other large US companies would blanch at approving a deal where the assets are owned indirectly and control could be so easily forfeited by Chinese regulatory action. But, Amazon, with founder Jeff Bezos firmly in control, has shown itself time and again to be comfortable with making rather bold bets. Success in China often requires that mindset.

negative

Of course, US buyers have also slipped on their share of Chinese banana peels. Three well-known Silicon Valley technology companies tried and mainly failed to do M&A successfully in China. All three followed a similar strategy to acquire domestic Chinese technology companies started and owned by Chinese who had previously studied and worked in the tech field in the US. The acquisitions followed the general strategic logic of most tech M&A within the US: to identify and acquire companies with complimentary proprietary IP. But, the results in China fell well short of expectations.

The three deals were:

  1. Cirrus Logic acquired Caretta Integrated Circuits in 2007. By 2008, the acquired company was shut down and Cirrus recorded a $12mn loss.
  2. Netgear acquired CP Secure in 2008. There is now no trace of the original CP Secure business, nor any indication it is ongoing concern.
  3. Aruba Networks acquired Azalea Networks in 2010, a Chinese wireless LAN provider.

Over the last five years, no similar M&A deals in China were announced by larger Silicon Valley companies. The strategy has shifted from acquiring companies for their IP to targeting companies for their domestic Chinese distribution and sales channels.  This reflects the fact that indigenous innovation in China has not made much of a global impact. IP protection in China is still inadequate by US standards. China is also a late adopter market, which further impedes the development of globally-competitive domestic technology companies.

The successful US acquisitions in China were all rooted in a different, more viable strategy: to buy one’s way directly or indirectly into China’s burgeoning consumer market.

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Abridged version as published in Nikkei Asian Review

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Chinese Firms Are Reinventing Private Equity — Nikkei Asian Review

Leave a Comment / August 12, 2020

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Pudong

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July 26, 2016  Commentary

Chinese firms are reinventing private equity

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Henry Kravis, his cousin George Roberts and his mentor Jerry Kohlberg are generally credited with having invented private equity buyouts after forming KKR 40 years ago. Even after other firms like Blackstone and Carlyle piled in and deals reached mammoth scale, the rules of the buyout game changed little: Select an underperforming company, buy it with lots of borrowed money, cut costs and kick it into shape, then sell out at a big markup, either in an initial public offering or to a strategic buyer.

This has proved a lucrative business that lots of small private equity firms worldwide have sought to copy. China’s domestic buyout funds, however, are trying to reinvent the PE buyout in ways that Kravis would barely recognize. Instead of using fancy financial engineering, leverage and tight operational efficiencies to earn a return, the Chinese firms are counting on Chinese consumers to turn their buyout deals into moneymakers.

Compared to KKR and other global giants, Chinese buyout firms are tiny, new to the game and little known inside China or out. Firms such as AGIC, Golden Brick, PAG, JAC and Hua Capital have billions of dollars at their disposal to buy international companies. Within the last year, these five have successfully led deals to acquire large technology and computer hardware companies in the U.S. and Europe, including the makers of Lexmark printers, OmniVision semiconductors and the Opera web browser.

So what’s up here? The Chinese government is urgently seeking to upgrade the country’s manufacturing and technology base. The goal is to sustain manufacturing profits as domestic costs rise and sales slow worldwide for made-in-China industrial products. The government is pouring money into supporting more research and development. It is also spreading its bets by providing encouragement and sometimes cash to Chinese investment companies to buy U.S. and European companies with global brands and valuable intellectual property.

While the hope is that acquired companies will help China move out of the basement of the global supply chain, the buyout funds have a more immediate goal in sight, namely a huge expansion of the acquired companies’ sales within China.

This is where the Chinese buyout firms differ so fundamentally from their global counterparts. They aren’t focusing much on streamlining acquired operations, shaving costs and improving margins. Instead, they plan to leave things more or less unchanged at each target company’s headquarters while seeking to bolt on a major new source of revenues that was either ignored or poorly managed.

So for example, now that the Lexmark printer business is Chinese-owned, the plan will be to push growth in China and capture market share from domestic manufacturers that lack a well-known global brand and proprietary technologies. With OmniVision Technologies, the plan will be to aggressively build sales to China’s domestic mobile phone producers such as Huawei Technologies, Oppo Electronics and Xiaomi.

The China Android phone market is the biggest in the world.  Omnivision used to be the main supplier of mobile phone camera sensor chips to the Apple iPhone, but lost much of the business to Sony.

In launching last year the $1.8bn takeover of then then Nasdaq-quoted Omnivision, Hua Capital took on significant and unhedgeable risk. The deal needed the approval of the US Committee for Foreign Investment in the United States, also known as CFIUS. This somewhat-shadowy interagency body vets foreign takeovers of US companies to decide if US national security might be compromised. CFIUS has occasionally blocked deals by Chinese acquirers where the target had patents and other know-how that might potentially have non-civilian applications.

CFIUS also arrogates to itself approval rights over takeovers by Chinese companies of non-US businesses, if the target has some presence in the US. It used this justification to block the $2.8 billion takeover by Chinese buyout fund GO Scale Capital of 80% of the LED business of Netherlands-based Philips. CFIUS acted almost a year after GO Scale and Philips first agreed to the deal. All the time and money spent by GO Scale with US and Dutch lawyers, consultants and accountants to conclude the deal went down the drain. CFIUS rulings cannot be readily appealed.

Worrying about CFIUS approval isn’t something KKR or Blackstone need do, but it’s a core part of the workload at Chinese buyout funds. Hua Capital ultimately got the okay to buy Omnivision five months after announcing the deal to the US stock exchange.

The Chinese buyout firms see their role as encouraging and assisting acquired companies to build their business in China. This often boils down to business development and market access consulting. Global buyout firms say they also do some similar work on behalf of acquired companies, but it is never their primary strategy for making a buyout financially successful.

Chinese buyout funds count on two things happening to make a decent return on their overseas deals. First is a boost in revenues and profits from China. Second, the funds have to sell down their stake for a higher price than they paid. The favored route on paper has been to seek an IPO in China where valuations can be the highest in the world. This path always had its complications since it generally required a minimum three-year waiting period before submitting an application to join what is now a 900-company-long IPO waiting list.

The IPO route has gotten far more difficult this year. The Chinese government delivered a one-two punch, first scrapping its previous plan to open a new stock exchange board in Shanghai for Chinese-owned international companies, then moving to shut down backdoor market listings through reverse mergers.

The main hope for buyout funds seeking deal exits now is to sell to Chinese listed companies. In some cases, the buyout funds have enlisted such companies from the start as minority partners in their company takeovers. This isn’t a deal structure one commonly runs across outside China, but may prove a brilliant strategy to prepare for eventual exits.

There is one other important way in which the new Chinese buyout funds differ from their global peers. They don’t know the meaning of the term “hostile takeover.” Chinese buyout funds seek to position themselves as loyal friends and generous partners of a business’s current owners. A lot of sellers, especially among family-controlled companies in Europe, say they prefer to sell to a gentle pair of hands — someone who promises to build on rather than gut what they have put together. Chinese buyout funds sing precisely this soothing tune, opening up some deal-making opportunities that may be closed to KKR, Blackstone, Carlyle and other global buyout giants.

The global firms are also finding it harder to compete with Chinese buyout funds for deals within China, even though they have raised more than $10 billion in new funds over the last six years to put into investments in the country. They have basically been shut out of the game lately because they can’t and won’t bid up valuations to the levels to which domestic funds are willing to go.

The global buyout giants won’t be too concerned that they face an existential threat from their new Chinese competitors. It is also unlikely that they will adopt similar deal strategies. Instead, they are getting busy now prettying up companies they have previously bought in the U.S. and Europe. They will hope to sell some to Chinese buyers. Along with offering genial negotiations and a big potential market in China, the Chinese buyout funds are also gaining renown for paying large premiums on every deal. No one ever said that about Henry Kravis.

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Peter Fuhrman is the founder, chairman and CEO of China First Capital, an investment bank based in Shenzhen.

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Abridged version as published in Nikkei Asian Review

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Chinese Private Equity Funds Are Taking on the World’s Giants — Bloomberg

Leave a Comment / August 12, 2020

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Bloomberg headline

Cathy Chan 

July 21, 2016 — 12:00 AM HKT

  • PE firms from China pursue overseas deals at record pace
  • One Italian target says China links are what matter most

Giuseppe Bellandi never imagined that his company, a 30-year-old maker of industrial automation components in the foothills of the Italian Alps, would end up in the hands of a private-equity fund from China.

But when the chief executive officer of Gimatic Srl realized that Asia’s largest economy was key to his firm’s future, and that Chinese PE executives had the expertise to help him grow there, Bellandi jumped at the chance to partner up. Last month, Gimatic turned down bids from Europe and the U.S. in favor of selling a majority stake to AGIC Capital, the PE firm founded by Chinese banker Henry Cai with backing from the nation’s sovereign wealth fund.

“I was really surprised when I realized how strong Chinese private equity firms are,” Bellandi said by e-mail.

China’s PE industry is expanding globally at an unprecedented pace, putting firms like AGIC, Legend Capital and Golden Brick Capital in competition with European and U.S. counterparts like never before. Fueled by China’s growing wealth, investor sophistication and desire to gain exposure to overseas assets, homegrown funds have taken part in at least $16.4 billion of cross-border deals so far this year, exceeding the previous annual record of $11 billion in 2012, according to Asian Venture Capital Journal.

The overseas push marks a coming of age for an industry that just a few years ago was better known for “buy-and-flip” investments in local companies already primed to go public. The approach was so pervasive that Chinese regulators asked KKR & Co.’s Henry Kravis, a private equity pioneer, to lecture domestic players on how to add more value.

This year, Chinese PE firms have participated in the $3.6 billion takeover of U.S. printer company Lexmark International Inc., the $2.75 billion purchase of Dutch chipmaker NXP Semiconductors NV’s standard products unit and the $600 million acquisition of Oslo-based Opera Software ASA’s web browser business. The sum of overseas transactions so far in 2016 is higher than Asian deals by foreign PE firms for the first time, according to AVCJ.

“These Chinese funds are already beginning to alter the calculus for buyout deals worldwide,” said Peter Fuhrman, the chairman and CEO of China First Capital, a Shenzhen-based investment banking and advisory firm. “It’s about buying companies that, once they have Chinese owners, can start making really big money selling products in China.”

For a QuickTake explainer China’s outbound M&A, click here.

The firepower to pull off such deals comes in part from China’s growing army of high-net worth individuals, whose ranks expanded at the fastest pace worldwide last year despite the country’s weakest economic growth in a quarter century, according to Capgemini SA. Rich Chinese investors are increasingly keen to diversify overseas after last year’s devaluation of the yuan spurred concern of more weakness to come.

“There’s a lot of domestic capital available, obviously looking for a home, and that’s fueling the emergence of these funds,” said Michael Thorneman, a partner at Bain & Co., a Boston-based consulting firm.

It’s no coincidence that the increased focus on international deals comes amid a record overseas shopping spree by Chinese companies, who have announced about $149 billion of outbound acquisitions so far this year. In some cases, PE funds are working with Chinese corporates and financial firms to help structure the deals and amplify their buying power.

For the Lexmark purchase, Legend Capital partnered with PAG Asia Capital and Apex Technology Co., a Chinese maker of ink cartridge chips. On the $9.3 billion takeover of U.S.-listed Qihoo 360 Technology Co., Golden Brick Capital teamed up with Chinese investors including Ping An Insurance (Group) Co.

Domestic Players

“PE funds like us have very experienced teams, who can do the whole thing from deal sourcing to negotiation to due diligence to deal structure,” said Parker Wang, the CEO of Beijing-based Golden Brick, which has invested about $2 billion since it opened in 2014 and also led the purchase of Opera Software’s browser unit.

It hasn’t always been smooth sailing. The Opera Software deal, for example, was originally supposed to be a takeover of the entire company, but suitors including Golden Brick failed to secure government approval.

Chinese funds are also becoming more active in their home market. They’ve been helped by a regulatory bottleneck for initial public offerings — which encouraged companies to turn to PE firms for financing — and the rise of China’s Internet industry, a business that the government shields from foreign ownership.

Local funds participated in domestic investments worth $48 billion last year, exceeding Chinese deals by foreign PE firms by a record margin, according to AVCJ. The number of active Chinese funds, at 672 during 2013-2015, was the highest in at least five years, according to data compiled by Bain & Co.

For more on one of the latest China PE investments, click here.

Among the most high-profile firms doing domestic deals is Yunfeng Capital, founded by Alibaba Group Holding Ltd. Chairman Jack Ma. The firm has purchased stakes in Citic Securities Co. and smartphone maker Xiaomi, while also participating in offers for U.S.-listed Chinese companies such as iKang Healthcare Group Inc. and WuXi PharmaTech.

Domestic funds typically have a home-field advantage over foreign firms in identifying promising investment targets, according to William Sun, general manager of Beijing Jianguang Asset Management Co., a PE firm that focuses on the technology industry.

“We’re all optimistic about China opportunities, but we probably have a better grasp of them than foreign funds,” Sun said.

To be sure, overseas players aren’t walking away from China. Some have partnered with domestic PE firms on consortium deals, as California-based Sequoia Capital did with Yunfeng on the WuXi PharmaTech takeover.

Growing Competition

Others have identified niches. KKR has spent about $1 billion on five food-related investments in China since 2008, betting that its global track record in the industry will help it thrive in a country that’s faced several food-safety scandals in recent years.

More broadly, foreign firms may be concerned about rising valuations in China, according to Bain & Co.’s Thorneman. The average PE-backed Chinese acquisition target in 2015 had an enterprise value of about 18 times earnings before interest, taxes, depreciation and amortization, up from about 11 in 2013, according to data compiled by Bain.

“There’s just more competition out there,” Thorneman said. “That translates typically into higher valuations, more competitive deals, and more players pushing prices up.”

Most signs point toward a bigger role for Chinese PE firms both at home and abroad. They controlled the largest portion of an estimated $128 billion cash pile in Asia-focused PE funds at the end of 2015, data compiled by Bain show.

Given that China is still growing faster than most major countries, any PE firm with the ability to help companies thrive there will have a leg up on international competitors, said Cai, the former Deutsche Bank AG investment banker who started AGIC last year and calls it an “Asian-European” PE firm. The fund, which counted Chinese insurance companies among its early investors, has offices in Beijing, Shanghai, Hong Kong and Munich.

“Few companies nowadays would care about the money or how much you pay them,” Cai said. “They care if the investor can help them break into the Greater China market.”

http://www.bloomberg.com/news/articles/2016-07-20/chinese-funds-that-kravis-urged-to-grow-up-are-now-kkr-rivals