The move in April by Southern European mid-market firm Investindustrial to open an office in Shanghai – its first outside Europe – is a reminder of the growing strategic importance of China to firms of all shapes and sizes.
A steady stream of global private equity players, such as The Carlyle Group and The Blackstone Group, have set up in China in the past couple of years to tap into the budding Chinese private equity industry and expand their market coverage.
New investments are, however, a long way down the priority list for Investindustrial, which has set up in Shanghai principally to assist existing Spanish and Italian portfolio companies with organic growth and M&A-driven expansion in Asia, says Carl Nauckhoff, principal and head of investor relations at the firm.
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In fact, the firm already has a decade of “ad hoc” activity in China behind it. With its specialisation in the industrial manufacturing and consumer, retail and leisure sectors, at least half of the firm’s existing portfolio companies have a China angle, says Nauckhoff. One example is Italian motorcycle manufacturer and brand Ducati, in which Investindustrial has owned a majority stake since it took it private in 2008. In October 2009 the company opened its first store in mainland China in Shanghai, one year after opening its representative office in the same city.
“China presents not only a manufacturing relocation opportunity for our engineering companies, but now more than ever real promise for our consumer-facing companies too,” Nauckhoff states.
The primary market for Investindustrial’s companies and brands, which also include Italian perfumer Morris Profumi, distributor of Ferrari and La Perla scents among others, and Italian fine wine maker Raffino, is still the developed West. However, while these markets offer stability, the prospects for growth in the West are “low”, Nauckhoff points out. Emerging Asian markets like China and India meanwhile, with their rapidly increasing and brand-hungry consumer base, offer companies the chance to increase market share exponentially and organically.
Currently some $600 million of Investindustrial’s portfolio company sales revenues – or a tenth of the total – are generated in Asia. With the above in mind, the firm has plans to grow this to $1 billion in the next three years.
But its not just Chinese appetite for Southern European brands at the consumer level that Investindustrial is banking on, but also at the investor level.
“We’re first looking to support the growth of existing companies, both organically and through M&A opportunities. But we’re building the bridge both ways; we think this will generate interest in Asian investors for Southern European assets,” states Nauckhoff.
He sees a “very interesting fit” between what China does – and more importantly doesn’t – have, and what Investindustrial can offer.
“China brings a lot of value to the table, such as manufacturing and a large domestic market. Our companies, however, have brand legacy, niche technology and penetration in mature markets. We think we may sell several of our companies to Asian buyers over the next five years.”
In order to achieve its aims, Investindustrial last year appointed Warren Liu as head of its Asian operations. Liu has 35 years of industry experience in China, most notably as the man behind the Chinese rollout of Kentucky Fried Chicken (KFC). Liu will build out the firm’s Shanghai presence to a team of five.
However, though Nauckhoff thinks such a move is “par for the course as a long-term trend”, he doubts we will see European mid-market firms arriving in Asia en masse anytime soon.
“The amount of time and resources it takes to implement a forward-looking strategic initiative like the opening of an office in China will prevent most firms from carrying it out,” he states.