Chinese companies that attempt to acquire assets in the US and Europe “often find themselves completely unprepared and defenseless”, according to Alberto Forchielli, managing partner of cross-border firm Mandarin Capital Partners.
China's outbound acquirers — 90 percent of which are state-owned enterprises — who attempt to do M&A without private equity backing can be “beat up abroad” Forchielli said, and he cited several examples including Chinese solar panel giant Suntech, which had a European solar field project that is now mired in scandal and being investigated by US regulators and the Italian anti-mafia authorities.
Mandarin Capital, he believes, has gained valuable experience in private equity-backed cross-border M&A, evident in the performance of its 2007 vintage Fund I. The vehicle is 90 percent invested across 10 deals, all outbound cross-border acquisitions from China to Europe. One of the firm’s more notable transactions was a co-investment in China-based Zoomlion’s $422 million acquisition of Italian concrete manufacturer CIFA in 2008.
“We made 10 investments and are making money on all of them,” Forchielli said. “There was no jackpot, but very stable returns, which proves our concept works.”
Forchielli shared some insight into China cross-border deals. First, Mandarin will rarely co-invest with the Chinese side because it can move faster alone than with the Chinese buyer. Second, it tries to ensure, pre-acquisition, that the target in Europe will be attractive to several potential buyers in China.
He also believes the sector choice is key. “In China there’s a tendency to over-invest, so there may be too much supply in a sector [that is nonetheless growing] compared to demand. That puts pressure on margin during the growth phase. So you look for sectors that will not be over-invested four years down the road.”
Finally, he prefers sectors that operate under certification, for example, food safety, pharmaceuticals and specialty chemicals. “The only thing that constrains uncontrollable growth of capacity is when the sector is riddled with certification and authorisation.”
Post-acquisition is not as bad as people tend to think, he said. “The Chinese have good intentions. They tend not to replace the locals because the last thing they want to do is weaken the company they buy. It’s seen as something like a crown jewel.”
Mandarin is raising a second fund targeting €500 million, which was revised from its initial target last August of €1 billion. Fund ll has a strong Germany focus in addition to Italy and the firm is using London-based placement agents Wedge Investments and Lancea Partners, he said.
Fund I closed on €328 million in 2007 and included investors such as China Development Bank, the Export-Import Bank of China and Italian bank Intesa Sao Paolo, according to the research and analytics division of Private Equity International.