Chinese offshore investment

China’s private equity funds lead the charge into European and American markets

PUBLISHED : Thursday, 03 November, 2016, 8:48pm
UPDATED : Thursday, 03 November, 2016, 10:01pm

Chinese private equity is leading investment into Europe and North America, keen on buying advanced technology in healthcare and tech sectors, a new report reveals.

The trend comes at a time when Chinese capital wants to cash in on the low valuations of quality assets in the West while boosting growth of domestic enterprises amid fierce competition with foreign counterparts.

In the first half of this year China-based funds invested US$7.4 billion in cross-border deals in Europe and North America, representing 85 per cent of the entire Asia investment, according to a new report published by Houlihan Lokey, Mergermarket and the Asian Venture Capital Journal.

The figure exceeded China’s US$5.8 billion investment in the full year of 2015.

The report shows healthcare and hi-tech have been the most coveted targets by Chinese capital.

Some deal highlights include the US$3.6 billion takeover of US printer company Lexmark International, the US$2.75 billion purchase of Dutch chipmaker NXP Semiconductors’ standard products unit, and the US$150m investment in Sorrento Therapeutics, a US-based biopharmaceutical company.

Besides bringing global best technologies and products to the mainland, the biggest driver of the trend is the maturation of the private equity investment market in China which is now pursuing opportunities to diversify and balance portfolios, said Jeffrey Wilson, a director with investment bank Houlihan Lokey’s Hong Kong office.

“The domestic market has become quite competitive and the valuations for quality assets are relatively high compared to the West, thus some outbound investment can be seen as bargain hunting,” Wilson said. “Along with this is the opportunity to buy in the West at a low valuation and subsequently list a company in China at a higher valuation.”

However, not all overseas merger and acquisitions (M&As) go smoothly and end up closing.

In the first nine months, 42 China outbound acquisitions worth a total of US$35.8 billion were withdrawn, already the highest annual level on record, according to Dealogic.

Chinese private equity firms will continue to face regulatory challenges from Western countries
Jeffrey Wilson, Houlihan Lokey

Some significant failures involving private funds included China Resources & Hua Capital’s US$2.5 billion offer for a stake in US chip maker Fairchild Semiconductor and China’s GO Scale Capital’s proposal to buy an 80 per cent stake in Philips Lumileds division in California for US$2.8 billion.

“Chinese private equity firms will continue to face regulatory challenges from Western countries, such as the US, Canada and Australia, which have set up formal review processes for foreign investments,” Wilson said.

“Sectors that involve sensitive technologies, such as aerospace, defence and semiconductors, as well as infrastructure sectors, are most likely to face regulatory challenges due to concerns over national security. Large and high-profile transactions may also trigger antitrust reviews.”

But Wilson added that these challenges are likely to gradually diminish as Chinese buyers become

increasingly sophisticated in designing deal structures and communicating with regulators.

Meanwhile, a separate survey said mainland China-based investors showed increasing interest in markets perceived to be safe havens.

The US and Australia saw a bump of 6 per cent and 2 per cent respectively in terms of favourable sentiment during the first 8 months of 2016, as respondents said they preferred tried-and-true destinations in established markets, according to real estate consultancy DTZ/Cushman & Wakefield.

By asset category, hotels are an increasingly attractive target for institutional Chinese investors given the growth in outbound Chinese tourists and relaxed US visa policies that encourage visits, said Justina Fan, DTZ/Cushman & Wakefield’s managing director.