China looks outwards

Guidance from China’s State Council, which classifies outbound transactions into encouraged, restricted and prohibited categories is expected to increase the number of M&A funds in the country targeting specific industries like manufacturing.

Under the guidelines, published on 18 August, ‘encouraged transactions’, which include infrastructure projects in the Belt and Road Initiative, high-tech businesses and energy resources, stand to benefit from preferential taxation, foreign exchange, insurance, customs, and information sharing.

As a result, Chris Lerner, head of Asia for Eaton Partners, tells Private Equity International that the industry is seeing the “development of more so-called M&A funds – which are essentially offshore acquisition funds – focused on directed industries that relate to manufacturing and industry upgrading”.

“The proliferation of these vehicles has no doubt slowed but they still exist, often in size and with government support, where the mandate includes direct investments in sectors or areas that are deemed important to the development of the overall economy and various well-publicised initiatives such as Made in China 2025 or One Belt One Road,” he explains.

This growth of M&A funds is reflected in China outbound dealflow. While the number of outbound M&A transactions above $5 million fell by 20 percent in the first six months of 2017 compared with the same period in 2016, dealflow has been resilient in basic materials, energy and utilities. Five of the top 12 deals announced since January have state-owned acquirers of overseas assets in this category (State Grid, Sinopec, Three Gorges, Shandong Gold and Yancoal), according to research firm Rhodium Group. Dealflow in high technology and modern service sectors such as telecom, media and computing has also been more resilient in the first half of the year.

Chinese M&A funds have taken a more prominent role in restructuring oversupplied state-owned enterprises. In the last three years the government has also allowed private equity firms and government-linked capital to set up these funds for cross-border transactions.

Beijing-headquartered CITIC has its own M&A fund which backs infrastructure developments that advance the Belt and Road system. Meanwhile Hong Kong-based private equity firm China Everbright has a Global Investment Fund, which has so far raised more than half of its $500 million target and a $3 billion M&A fund with IDG Capital Partners which will support growth companies in China and overseas. AGIC Capital, an Asia-Europe cross-border buyout firm, which in February collected $1 billion for its debut vehicle, is another example.

China’s healthcare and technology sectors have also increasingly relied on M&A funds to consolidate key growth industries. In January, CITIC Bank and Sanpower Group said they would raise at least $2.9 billion to launch a healthcare industry M&A fund targeting Chinese and overseas biotech companies. In the same month the government also launched the $1.4 billion Asia FinTech M&A Fund of Funds to focus on investment opportunities in the region.