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PE Asia, October 31, 2012


Unprepared Chinese companies are increasingly hunting for prime assets in the West, handing private equity an opportunity. Michelle Phillips reports.

China's private equity-backed acquisitions in foreign countries have surged in the last few years. The value of 2012 deals ($8.1 billion) is already double that of 2011 ($4.2 billion), according to data from Thomson Reuters. Some of the most prominent examples this year are Dalian Wanda's $2.6 billion acquisition of AMC Entertainment, and Sany's $408 million acquisition of Germany's Putzmeister in partnership with CITIC PE.

Outbound has several drivers. Bargains for prime assets from the US and Europe continue to emerge as these economies try to pull out of debt crises. In addition, the Chinese government is making offshore acquisitions easier from a regulatory perspective. The idea is to encourage success stories like Lenovo, which became a world class brand name after the 2005 acquisition of IBM's personal computing division with TPG, General Atlantic and Newbridge.

Perhaps unnoticed by Chinese firms seeking foreign brands (and a story not told by private equity firms) is the extent to which private equity may have played a key role in Lenovo's rise as a Chinese global brand. Thomas Gilles, head of the China desk of Baker & McKenzie's German office, says his firm has advised on many cross-border deals into Europe, and he has seen an advantage in deals involving private equity. He cites their connections on both sides of the transaction that enable the deal to close at a fair valuation - expertise that is vital for Chinese companies with limited overseas experience. " Private equity firms are the strategic reigns behind the transaction," Gilles says. Moreover, in his experience, private equity firm involvement with a Chinese acquirer tends to attract foreign companies that are looking to sell their assets, he says. There's always a big gap to bridge," Gilles says, "because in the past there hasn't been much of an overlap in Europe" with Chinese companies.

Frank-Jürgen Richter, founder of research group Horasis and former director of the World Economic Forum, estimates that about 70 percent of proposed cross-border deals do not end up closing and most of these failed deals are without private equity involvement. Richter, who advises Chinese companies acquiring German assets, believes that Chinese companies (which are often state-owned enterprises) tend to have too many ambitions going into the deal. They don't know the nitty-gritty stuff," he said, and will just put down money before sufficiently investigating the company they are buying. In such cases, Richter adds, private equity firms can keep them from rushing in and, additionally, help them understand the differences in business culture, such as corporate governance and personal relationships.

A Capital, which specialises in cross-border deals between China and Europe, has seen a definite pattern in its deals. "The deals that did well had a strategic rationale for them," says Andre Loesekrug-Pietri, managing partner. One approach is adding a China angle to foreign business models. In July, A Capital initiated a partnership between the Danish highend electronics maker Bang & Olufsen and China distributor Sparkle Roll. Though not an acquisition, the partnership is crucial to Bang & Olufsen's first significant push into Asia, PE Asia reported earlier. But industry involvement in outbound deals doesn't guarantee success. According to an industry source, private equity-backed deals have also failed to close due to the same attraction to discounted value. Many deals "looked good on paper; they were taking advantage of low valuation," but the acquirers did not think about the long-term development of the acquisitions, the source explains. It's a new sector, so it's understandable that everybody is learning a lot," Loesekrug-Pietri adds.


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