Annual review 2016: Ambitious transactions in Asia

Cashed-up Chinese investors were a global force in deal-making in 2016. There were many reasons for last year’s mergers and acquisitions explosion including cheap debt, the demand by Chinese companies for advanced technology, growing competition for deals at home and a slowing Chinese economy.

According to data from Mergermarket, Chinese dealmakers – including private equity firms and strategic investors – engaged in 258 deals outside of Asia worth $185.3 billion, 3.8 times higher than 2015’s record deal value at $49.1 billion and 177 deals.

Healthcare and technology were the most favoured targets. Among notable private equity deals, the year began with Asian-European firm AGIC Capital’s acquisition of German machinery company KraussMaffei Group for €925 million, the largest-ever outbound investment from China into Germany. Other multi-billion dollar transactions include the $9.3 billion takeover of US-listed Qifoo 360 Technology by a team of Chinese investors that included Golden Brick Capital and Ping An Group, as well as PAG Asia Capital’s $3.6 billion acquisition of US printer company Lexmark.

While the Chinese government remains vigilant about controlling capital outflows, reforms in May 2016 continued to encourage Chinese companies to go global. China’s outbound investment regulator, the National Democratic Reform Commission, simplified overseas M&A rules, so that deals of more than $2 billion and investments in sensitive sectors such as media and telecom would no longer need State Council approval or show proof of financing.

Deal volume remained strong over the year, but the Chinese government changed track in November, announcing that “strict controls” would be imposed over deals worth $10 billion or more, and on investments of more than $1 billion in sectors unrelated to a company’s core business, until September 2017. This move will likely result in a more muted outbound deal-making market for 2017, although the appetite for investment remains.

Meanwhile in Japan, the outbound deal-making spree has been a consistent feature since Prime Minster Shinzo Abe tried to kick-start the economy with his “Abenomics” stimulus programme in 2013. According to Bain & Company, Japan’s outbound M&A deal value over the last three years jumped 34 percent a year and now accounts for half of Japan’s total M&A activity. To put this in context, the total value of Japan’s outbound M&A was at $53 billion in 2014; by the end of October 2016 that figure had almost doubled to $95 billion.

Taisuke Sasanuma, founder of Tokyo-based private equity firm Advantage Partners, told Private Equity International he is seeing growth in cross-border related investments between Japan and other Asian countries.

“Companies with products, services or technologies that can be expanded or transferred to large consumer populations or economies outside Japan in Asia are particularly interesting to us.”

He added: “Countries such as China, Thailand and Malaysia offer attractive control investment opportunities in companies that may benefit from our Japanese networks and presence to introduce customers or create links between Japanese corporates and partners.”

AMERICA’S APPEAL
The US continues to be the most sought-after location for deals. Last year, inbound deals from Chinese companies reached a peak of $63.6 billion, a 5.3 times rise over 2015’s $11.9 billion, Mergermarket data indicated.

Despite the Committee on Foreign Investment in the US increasing scrutiny on big inbound deals, investors in the region are stepping up their hunt for US businesses.

Gopher Asset Management, the investment arm of China’s largest wealth management platform Noah Holdings, is looking to ramp up its US venture investments.

PV Wang, chief investment officer of Noah, told PEI: “What we are clearly recommending to our high net worth clients in China is more global allocation. And US venture capital is an area we find very promising given all the technological disruption and push for creativity happening in that market.”

Japanese companies have also been drawn to the US market. Telco giant SoftBank made headlines last year when it launched its whopping $100 billion tech investment fund. The Vision Fund targets global tech companies but industry sources say the US is a favoured market to deploy capital, especially after SoftBank founder Masayoshi Son pledged to invest $50 billion in the country to create another 50,000 jobs.

Australia is another destination that Chinese firms are comfortable with. And to tap this opportunity, the Queensland Investment Corporation – the investment arm of the state of Queensland – inked an agreement with Ping An Asset Management Company in November to pursue more cross-border collaboration.

QIC chairman Don Luke said in a statement that “China is an important market for QIC given the rapid growth in Chinese domestic investment capital and increasing capital mobility between the nations.”

DEAL STRUCTURES
Due to the increasing competition for overseas assets, creative capital structures are also on the rise.

“Chinese investors are indeed getting more sophisticated, especially in their ability to use internationally accepted acquisition financing structures,” Michael Chin, a Shanghai-based partner at global law firm Hogan Lovells said.

“We are seeing some of the structuring of those deals using high-yield bond techniques as well as a couple of light Term B loans – these are the sort of structures that in years gone by you wouldn’t even expect Chinese private equity firms to deploy, but they are clearly doing that now.”

2016 also saw an uptick in partnerships between private equity firms and strategic investors.

Hong Kong-based PAG teamed up with Chinese printing company Apex Technology for Lexmark, while a club of Chinese investors banded together for Qifoo 360 Technology.

Steven Tran, a Hong Kong-based partner at Hogan Lovells added: “Along with the emergence of credible and increasingly successful China-based funds who continue to compete head-to-head with international private equity funds, we are also seeing strategic investors and private equity firms competing against each other for the same, and increasingly limited, number of assets each year.”

Added to this mix are the very deep pockets of the Chinese conglomerates who are equally hungry to expand and develop, the likes of Fosun, Dalian Wanda, Anbang and Ping An – they are really giving the sizeable private equity funds a run for their money.” ?

CLEAN LIVING
China’s growing pollution problem is a key factor driving overseas investments in healthier products as consumers look to clean up their lifestyles.

“Chinese consumers are starting to re-prioritise what they think is important,” said Shaun Rein, managing director of China Market Research Group, at a Baker & McKenzie China outbound investment session.

“Instead of buying a luxury handbag, they want to buy experiences and wellness; instead of buying a Nestlé KitKat, they’re buying manuka honey from New Zealand or salmon from Tasmania.”

Australia and New Zealand – countries known for food safety, quality control and clean, healthy products – have benefited greatly from Chinese outbound deals.
According to data from Mergermarket, between 2005 and 2016, Chinese life sciences and healthcare deals accounted for 11 percent of Australia’s total deal volume.