Private equity to benefit from simpler Chinese merger code

Proposed Chinese regulations to simplify outbound deal-making will provide more opportunities for offshore private equity firms to work alongside Chinese companies.

Plans to simplify China’s outbound investment rules to boost overseas acquisitions by Chinese companies are expected to create opportunities for local private equity firms to invest alongside them.

Charles Ching, a partner at law firm Weil, Gotshal & Manges told Private Equity International that the latest proposed changes are a continuation of the overall trend in the past few years to simplify the outbound approval process and  will help Chinese companies compete for quality assets abroad.

“More companies going out to buy assets, technology and know-how means they would need investors to finance their acquisitions. That leads to a greater ability for private equity firms to participate alongside Chinese companies not just for financing but also because they have familiarity with international sale processes and sector expertise,” Ching said.

Hong Kong Venture Capital and Private Equity Association chairman Conrad Tsang agreed that it would create opportunities for the private equity industry, as more Chinese companies are looking to snap up high quality US and European technology and brands to bring back into the local market.

The draft rules compiled in April and published by the National Development and Reform Commission (NDRC), China’s outbound investment regulator, will speed up approvals and allow local companies to bid against each other for the same foreign asset. They are expected to be implemented soon after consultations close this month.

Current outbound rules require companies to register overseas investments in excess of $300 million with the NDRC, before they can begin any substantive work such as conducting due diligence or making a binding offer. Those investing in “sensitive sectors” such as infrastructure, telecoms, large-scale land development, water and energy resources development and media also need to get approval from the State Council, China’s central government.

With the proposed amendments, Chinese companies involved in deals of $2 billion or more in sectors or countries China deems sensitive will no longer need approval from the State Council, or to provide proof of financing. Other regulatory procedures will be streamlined including delegating approval to provincial NDRC offices for certain outbound investments, as well as removing the commission’s approval for the transfer of overseas investment projects that have previously been assessed.

A number of Chinese companies have already partnered up with private equity firms to pursue overseas acquisitions. Chinese computer hardware company Apex Technology recently acquired US printer company Lexmark International alongside private equity firms PAG Asia Capital and Legend Capital for an all-cash transaction valued at $3.6 billion. Another Chinese company, Haier Group had partnered with Cinda Asset Management and bought General Electric’s appliance unit for $5.4 billion.

According to Mergermarket, Chinese outbound M&A recorded an increase of 126.9 percent in the first quarter of 2016 compared with the same period last year, with most deals concentrated in the consumer, financial services, industrials and technology, media and telecom (TMT) sectors. A total of 398 deals in China in Q1 2016 amounted to $92 billion, contributing more than 60 percent of the total deal value in the Asia-Pacific region.

While local companies going out to buy resources, technology and brands, are all positive for China’s long-term development, Hong Kong Venture Capital and Private Equity Association chairman Conrad Tsang cautions that capital flowing out at a rapid pace may affect how investors see the Chinese currency.

“In the private sector, we have seen some people going out because of fears of renminbi devaluation. Hence, the government is monitoring the currency and the pace of overseas investments in order to manage people's expectations of the renminbi.” Tsang said.