More than a quarter – 29 percent – of GPs say they lost out to a Chinese bidder in auction processes during 2016, according to a report by MVision Private Equity Advisers and the London Business School seen by Private Equity International.
The report – Rise of the Rooster: Chinese outbound M&A in 2017 and beyond – surveyed 58 private equity firms across the globe with a combined $440 billion of assets under management.
Two thirds of respondents said they came up against a Chinese buyer in an auction process more frequently in 2016, and 45 percent said they thought the offers submitted by Chinese buyers were overpriced. More than three-quarters said they believe increasing numbers of Chinese bidders are driving up valuations.
Almost half – 47 percent – said Chinese firms were most active in the mid-market which, the report notes, is “a space already crowded by a number of medium sized GPs with $1 billion+ funds, and large-cap players reaching down to access high growth opportunities”.
The report noted that 2016 was a record year for outbound Chinese investment, with a total of 372 deals worth $206.6 billion, a 118.7 percent increase on the previous year, according to data from Mergermarket. Eighty-three percent of respondents noted an uptick in Chinese acquisitions in 2016.
The respondents predicted mainland Europe would attract the most Chinese investment activity in the next 12 months, followed by the US and Africa. Those surveyed also expect Chinese buyers to continue to focus on healthy assets and well-known brands.
Mounir Guen, chief executive officer at MVision, told PEI that corporate buyers – including family offices – are the most commonly seen type of bidder, but that China has a well-developed general partner community.
“There are some prominent groups in Asia, China in particular. China is the only country outside Europe and the US that has a group of general partners that have funds in excess of $3 billion,” he said.
“There’s some pretty significant pools of capital. If you combine the dollar funds with the local currency funds, these are big firms. And if they can link some prominent concepts, whether it’s consumer or technology or industrials or logistics, to China and help them grow, as well as potentially making them pan-Asian. It’s a very powerful story.”
Guen said he expects the allocation of Chinese capital to private equity as an asset class to grow ten-fold in the next decade.
“This is only the beginning. If you look at the asset growth, the pensioners’ growth and the wealth of these countries and their economic growth rates, there’s a lot of capital forming there, and that capital is smart.”
However, as Guen and LBS professor Francesca Cornelli point out, the interaction between private equity and Chinese outbound investment is “multi-dimensional”. As well as competing with more established capital pools on deals, Chinese buyers are providing a lucrative exit route for GPs, and increasingly making commitments to their funds.
Eighty-six percent of GPs polled believe increasing numbers of Chinese buyers will provide them with more exit opportunities.
Last summer US cinema chain AMC Theatres, which is backed by Chinese conglomerate Dalian Wanda, agreed to acquire Odeon and UCI Cinemas Group from Terra Firma Capital Partners in a deal valuing the businesses at around £921 million (€1.1 billion; $1.22 billion).
In April 2016 UK-headquartered 3i Group sold Mayborn Group, the owner of baby products business Tommee Tippee, to Shanghai Jahwa, China's largest domestically-owned manufacture of personal care products and cosmetics, in a deal understood to value the business at around £300 million, delivering a 3.6x return to 3i and its investors.
Half of those polled said they intend to proactively seek Chinese commitments for new funds in the next 12 months. The report points out that a number of large Asian insurers handed out mandates last year.
Those surveyed pinpointed government intervention as a potential roadblock to Chinese outbound investment, which could end up benefiting Chinese GPs, as corporates looking for exposure to international investments divert more capital away from direct investment to avoid excess scrutiny.
While the study focused on China, Guen said positive market dynamics and significant capital pools meant others wouldn’t be far behind.
“The vast majority of the global middle class will reside in Asia, and an ability to link to that market – link to that dynamic – is at the forefront of every entrepreneurial company,” he said.
“India is also growing at over 7 percent. It won’t be long before those companies are all involved. Japanese corporates have been very active.”