China control deals expected to grow

In China, some see evidence of a gradual shift toward control investments due to a generational change and slowing GDP growth, delegates heard at the HKVCA Forum in Hong Kong.

Investors in China should expect control deals to become more common over the next few years, attendees heard at the Hong Kong Venture Capital Association Asia Private Equity Forum this week.

There are many reasons for the shift, panel speakers said. Terry Hu, managing director at FountainVest Partners, which recently closed a $1.35 billion fund, believes one such opportunity is driven by a generational change among business owners who are getting closer to retirement age. If the children are not interested in running the family business, private equity can be an attractive option succession option, he said.

In addition, the slowing growth of China has brought the operational weaknesses of Chinese companies to the forefront. Although private equity firms can never run the business better than its founders, “we can usually see what’s wrong”, said Derek Sulger, partner at Lunar Capital.

In order to successfully turn around struggling companies, a private equity firm needs a control stake, and needs to be working on that company full-time, delegates heard. Sulger added that trying to turn a company around without holding a controlling stake “is like fixing the wings on a plane while it’s still flying.”

However, Conrad Tsang, managing director at Baring Private Equity Asia, was sceptical of control deals in China that leave the founding entrepreneur with a significant minority stake because often the founding entrepreneur/family will have a disproportionate sway on the business.

“In many situations, you think you have control but you actually don’t,” he said.

Greater China had a 42 percent drop in annual deal value to $9.9 billion from $17 billion in 2011, according to Mergermarket data, but a Hong Kong-based GP that recently raised a sizable fund for China told Private Equity International that he is not worried about finding investments for his fund.

There may be fewer transactions on the one hand, but he expects deal size to increase. (Currently the average private equity deal size in China is $190 million, according to Mergermarket). Despite slowing GDP growth, his fund's investment strategy will remain focused on the themes of the rising middle class, environmentally friendly investment and urbanisation.