Olympus ups investment in China dairy

Olympus Capital has led a $50 million follow-on investment in Chinese milk producer Huaxia Dairy.

Olympus Capital Holdings Asia has led a second round of investment in Chinese milk producer Huaxia Dairy, alongside California Technology Ventures, Herostar Holdings and Grand River Capital, totaling $50 million, according to a company statement.

In July 2011, Olympus led an initial round of investment in Huaxia totaling $45 million. In this most recent round, the firm provided $38 million of the capital, bringing its total investment in Huaxia to $68 million.

No debt funding was used in this investment, according to Peter Cimmet, Olympus Capital executive director and one of Huaxia’s board members. “We wanted to give the company maximum flexibility with equity up front,” he said.

Olympus still holds an undisclosed significant minority stake in Huaxia, and continues to have two seats on the company’s seven-person board. Cimmet confirmed that Olympus is by far the largest shareholder in the Chinese company, though it does not have a majority stake.

The capital from the follow-on investment will primarily be used for expansion. The company is planning to complete two new farms near Beijing in the next few months and open five more stores in the capital by year’s end, according to the statement. Cimmet also said that Huaxia hopes to start a second hub in Shanghai sometime next year.

The company is appointing dairy industry veteran Jia Qi “George” Zhang to the newly-created role of chief executive, starting in December. That was a decision reached mutually by both the company and investors, Cimmet said.

“One of the key constraints on the business was having enough depth in the management team,” he added.

Cimmet told PE Asia that investors saw a good opportunity for growth with increasing demand from both domestic and international producers. In China especially, milk producers are “very conscious of safety issues”.

In China, milk is primarily used in products such as yogurt and ice cream, Cimmet said, and the market is forecast to have a compound annual growth rate of 20 percent. Yet market penetration is still very low.

Olympus Capital is not the only private equity firm interested in China’s dairy market. Kohlberg Kravis Roberts and CDH completed a series of investments in China’s Modern Dairy through 2010. Modern Dairy raised HK$3.5 billion (€338.8 million; $450.8 million) from an initial public offering in November 2010.