Chinese private equity goes global

As China's cross-border M&A picks up, Hamilton Lane's Juan Delgado-Moreira sees the potential to create the country's own Carlyles and KKRs.

China is undergoing a period of transition from an export-led market to a consumption-based economy. Accompanying this transition is an increase in spending among the middle class with an appetite for more premium products and diversified services. To support this demand, some Chinese companies, including private equity firms, are looking further afield for acquisitions. Recent examples include:

The $700 million bid for Club Med by China’s Fosun, which teamed-up with AXA Private Equity. 

In the food sector, Shuanghui’s offer to acquire US pork producer Smithfield, which is known for high quality brands, slick processes and high safety standards. China’s CDH is the largest private equity investor in Shuanghui. 

There is no shortage of capital looking to support China’s shift to diversified, higher-quality consumption. First in line to allocate capital to these companies are the Chinese private equity firms managing US dollar funds. The role of private equity in facilitating domestic consumption growth will be critical in China, as it has been elsewhere, and consumer sector deals are typically the largest sector. It is likely that domestic private equity firms will increasingly seek acquisitions abroad. Some may also choose to partner with Chinese corporations to secure targets.

The role of private equity in facilitating domestic consumption growth will be critical in China…and consumer sector deals are typically the largest sector

A particular area of focus will be on helping portfolio companies develop attractive brands that appeal to the new image-conscious and cash-rich consumer, such as private education, intellectual property and premium components for the high-end automotive sector.

However, acquiring abroad comes with risks. Private equity can help, but it has also shown recently that it is not foolproof. For example, there has been a strategy shift. Traditional strategies are being abandoned and new ones are not well thought out; private equity firms are either overpaying for assets, not managing the assets correctly or even going after the wrong assets in the wrong country. Tempted by opportunities for growth, private equity fund managers may even abandon their core strategies to achieve it.

To address the issue of strategy shift, the most seasoned Chinese private equity firms may choose to invest alongside domestic companies and entrepreneurs to help ensure that the growth stays as close as possible to the Chinese consumption angle.

Hamilton Lane is aware that some of these firms are already conducting “trade visits” to Europe to develop relationships with European fund managers who could help them identify targets and execute in foreign jurisdictions. The name of this strategy will change (outsourced manufacturing last decade, cross-border investing last year, add-on acquisitions and roll ups tomorrow), but Hamilton Lane sees significant activity on the horizon.

Political tension and public debate can also impact reputations. A past perception has been that Chinese companies, flush with cash, are embarking on a “shopping spree” as they eye acquisitions abroad. In some cases in the US, national security has been cited as a risk.

In Europe, it’s a sensitive time as many countries struggle with low economic growth and high unemployment. There is the risk of public backlash if iconic brands were to be purchased. Even though we saw muted public response from Lenovo’s purchase of IBM’s PC unit in 2005, it may be a different story in Europe, amid ongoing social debate.

Despite the various risks, the trend ahead is clear: Chinese companies will increasingly look to the mature markets of the US and Europe to purchase quality businesses, technologies, products and services and private equity will be at the heart of this strategy. Any activities abroad by Chinese private equity firms will contribute to internationalisation and institutionalisation in the industry, ultimately leading to the Carlyles and KKRs of tomorrow.

Juan Delgado-Moreira is the managing director and head of international at Hamilton Lane