Private equity surges in China as M&A market widens

Private equity accounted for a record share of Chinese mergers and acquisitions in 2021, and the country’s well-funded buyout firms should also be busy this year as corporate restructurings and multinational divestitures generate more targets.

The industry’s growing influence contrasts with relatively subdued overall M&A activity in China, which last year grew much more slowly than a booming global market.

Private capital-backed deals in China jumped 26% last year to a record $108 billion, according to Refinitiv data, representing an unprecedented fifth of all deals by dollar value. The figures include Western-style takeovers by private financial firms, as well as smaller investments and deals led by state-backed investors.

By contrast, overall M&A with Chinese involvement edged up 2.8% to $580 billion, lagging a nearly two-thirds increase in global deals.

“You’re starting to get some significant, China-focused private equity deals, and all of that is being fed from a number of sources, including institutional sources that have grown in recent years from China, ranging from wealth management to insurance companies to municipalities, government financing and so on,” said Victor Ho, a Hong Kong-based lawyer specializing in mergers and acquisitions and private equity at Allen & Overy.

“As an asset class, putting money into private equity has taken off for Chinese investors,” he said.

Overall, cross-border mergers and acquisitions have been hampered by Beijing’s anti-Covid policy and its desire for greater self-sufficiency, in part through a “dual circulation” policy, or to support growth by self-sufficiency. focusing on a huge domestic market.

“Mergers and acquisitions in China have been more inward-looking, reflecting the government’s emphasis on its dual circulation strategy,” said Colin Banfield, head of Asia-Pacific mergers and acquisitions at Citigroup. Inc..

, adding that China’s position on Covid-19 also played a role. “The impact on cross-border travel has made it difficult to complete some transactions,” he said.

Still, Chinese and global private equity firms are looking for targets. Local companies include players such as Primavera Capital Group, which was founded by Fred Hu, former president of the China division of Goldman Sachs Group Inc., and Hillhouse Capital Group, founded by Zhang Lei. Active international players include buyout giants Blackstone Inc. and KKR & Co.

Asset sales by multinational companies, particularly in the consumer sector, have generated some activity. One of the biggest last year was the $2.2 billion investment in infant formula by Primavera, with its purchase of the Chinese operations of Mead Johnson Nutrition Co. from Reckitt Benckiser Group PLC..

“We are seeing more and more opportunities in divestment and spin-offs from Chinese operations by foreign brands in each of the consumer market segments,” said Stephen Zhang, a Beijing-based Primavera partner. “International brands often struggle to catch up with the ever-changing local consumer market,” he said.

Nine of the top 10 Chinese deals last year were domestic mergers and acquisitions. Many important transactions are government-related. For example, the largest private equity-type deal of the last year, according to Refinitiv, was a $6.6 billion investment in the restructuring of bad debt manager China Huarong Asset Management Co.,

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involving public investors such as giant financial conglomerate Citic Group.

In another big deal, state-backed venture capital firms Beijing Jianguang Asset Management Co., known as JAC Capital, and Wise Road Capital have agreed to back debt-ridden chip company Tsinghua Unigroup Co.

Another deal driver is renewable energy, electric vehicles and other businesses attractive for environmental, sustainability and governance reasons. “We see people paying more and more attention to ESG or green sectors in inbound, outbound and domestic deals in China,” said Miranda Zhao, head of mergers and acquisitions for Asia-Pacific at Natixis.

For example, last year a group of investors invested $1.6 billion in seed funding in electric vehicle battery maker Svolt Energy Technology Co. The industry refers to these deals as growth investments. instead of taking control through a buyout.

Although striking cross-border deals may remain difficult, not least because authorities have shown no signs of easing China’s zero-Covid strategy, domestic M&A could see a stronger year in 2022.

China appears to be completing a regulatory reset that analysts say should put the country on a more sustainable growth path, though it has caused difficulties for many companies and investors. Meanwhile, the central bank decided to ease its monetary policy to support the economy.

All of these factors bode well for merger volumes, said Richard Wong, head of Asia-Pacific mergers and acquisitions at Morgan Stanley..

Chinese private equity “still has a huge avenue for growth and buyout opportunities,” he added.

Write to Jing Yang at [email protected]

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