China restructurings may rise in 2013

Under China's new leadership, the number of state-invested companies requiring restructuring may increase, presenting PE with an opportunity, according to a mainland research center.

China’s leadership handover next month is expected to result in an acceleration of the number of domestic companies in need of restructuring or reorganisation, according to Shuguang Li, chairman of the China Bankruptcy Law and Restructuring Research Center and a recently appointed advisor to accounting firm JLA Asia.

Li estimates that of China’s 10 million enterprises, around 10 to 20 percent are in need of some form of restructuring. Every year, as much as 800,000 companies, particularly SMEs, go out of business. “They are born fast, so they die fast,” he said.

The government has for years been gradually scaling back on the amount of support it provides to domestic businesses. It is generally believed that the seven new Politburo Standing Committee members are more politically liberal and market-oriented, and expectations are that they will speed up market reforms, pulling the plug on government investment in many businesses.

Domestic businesses will soon need other sources of money, Li said. While banks may have the capital, they are often too conservative to turn a troubled company around. Li believes one option is private equity, which can offer the most in terms of turnaround and reorientation of a cash-strapped business.

“Private equity often has a more complete view [than banks do], looking more at the company’s future,” Li said. “They also have a much better grasp of business structure.”

In 2012, private equity made 12 restructuring investments in public companies, up from 10 in 2011. He believes the trend will continue in 2013, but most investments will be in the private sector (for which there is no official data).

Private equity participation in restructuring, however, will hinge on the approach regulators take under the new government. For example, recent regulatory changes, such as the revised Securities Law, impact on investors that aim to restructure companies. 

Another complication is that the vast majority of private equity investments in China are minority stakes. To do an effective restructuring, a controlling stake is required, said Derek Sulger, partner at Lunar Capital, at a recent industry event.