Borrowing curbs seen capping leveraged buyout activity in China

PUBLISHED : Thursday, 02 March, 2006, 12:00am
UPDATED : Thursday, 02 March, 2006, 12:00am

The mainland corporate scene is ripe for the picking by leveraged buyout funds, but restrictive share transfer and borrowing rules will keep a cap on the market in the near future.

Leveraged buyout firms borrow money to buy a company in order to expand it and make it more profitable. They then try to sell it at a profit.

'The consensus for private equity firms and banks is that China will be the site of some of the biggest deals in the next two to three years,' said Brett King, a leveraged buyout specialist with law firm Paul, Hastings, Janofsky & Walker.

Plenty of private equity firms appear to agree. International firms such as Carlyle Group have recently opened offices in Asia, while Texas Pacific Group said it planned a broader presence in Asia alongside regional affiliate Newbridge Capital. CVC Asia Pacific raised a US$2 billion Asian buyout fund last year, while CCMP Capital Asia raised US$1.6 billion.

But Mr King said there were many hurdles keeping the growth of the sector in check.

Japan and South Korea have seen increasing leveraged buyout activity in recent years, but the mainland is just getting started. Mr King estimated there could be about 10 mainland deals worth more than US$100 million each in the next two years.

Mainland laws on securities lending are undeveloped and untested, and restrictions on share transfer make it difficult to get full control of companies, many of which are still partly state-owned. Deals and their financing are done offshore using a holding company, limiting the amount that can be borrowed for the deals.

While a mainland deal may be leveraged 11/2 times, a deal in Europe or the United States can be leveraged seven or eight times. Banks remain a major source of capital in Asia.

'There could still be a lot more leverage and if there was more leverage, you could have a lot more transactions,' Mr King said.

The Centre for Asia Private Equity Research estimated private equity firms raised US$17.6 billion for investment in Asia last year, with US$7.2 billion worth of buyout deals done across the region.

Private equity firms seeking takeover targets on the mainland were more focused on companies that could easily be expanded into global competitors, particularly in the manufacturing and industrial sectors, Mr King said.