Chinese family businesses open to control-buyout amid succession void, says PE firm Lunar Capital
Few children of Chinese entrepreneurs want to run their family business
Lunar Capital, a Chinese private equity firm which runs a US$350 million fund, sees the country’s entrepreneurs who pursue higher growth for their businesses are slowly warming up to control-buyout.
Robin Song, partner of consumer sector-focused Lunar Capital, said their increasing openness towards control-buyout opportunities stems from many Chinese entrepreneurs’ need to tackle one common problem confronting their business – that of succession and growth.
These first generation entrepreneurs who started their business in the 1980s and 1990s are now in their 50s, and are facing a void in their business succession as their children do not want to take over the family businesses.
“For these private businesses to grow to the next level, and compete with new start-ups and perhaps foreign players entering China consumer space, they will have to innovate,” said Song on the sidelines of a private equity industry forum in Beijing over the weekend. “This means they need to institutionalise these family-run businesses, to establish a corporate culture within this business through new capital and resource injection.”
With a majority stake that confers voting power, buyout firms can then steer changes in private companies with cross-border investments, implement staff incentive programme to attract talent, digitalise their businesses and broaden their sales and marketing infrastructure, Song said.
His view is echoed by some industry observers, who say Chinese family-held business owners have in the past lacked a strong motivation in giving up control, preferring a tight circle of decision makers within the family. But as this current generation of business owners go into retirement, this mentality may change and this opens up more opportunities for buyout funds.
Lunar Capital is currently investing its US$350 million fund – its fourth dollar fund.
Lunar Capital’s limited partners include university endowment and pension funds in the US, Europe, sovereign wealth funds, and family offices outside China. Lunar has completed over 20 buyouts.
One key consumer-sector focus of the fund is childrenswear. In 2014 it has acquired Italian brand I Pinco Pallino, which is sold in over 400 locations across Europe, Middle East and Asia.
The cross-border deal was motivated by Lunar’s desire to elevate the product design capability of another Chinese infant apparel brand, Yeehoo, that it had acquired in 2012.
“That transaction symbolises our approach towards cross-border buyout strategy. We will leverage on the existing business of our portfolio companies in China when we source buyout targets overseas,” said Song.
Apart from consumer staples and discretionary, Lunar Capital’s portfolio companies also include those in the material sector such as plywood manufacturing, timberland processing, and fluorspar.
Going forward, Song said he sees opportunities in renewable energy and the environmental sector, which is one big weakness lagging China’s ongoing economic development, though he stopped short on further details.
“As China’s private equity sector develops, control-buyout funds are a good complement to other PE strategies such as angel funds, venture capital and growth-stage investing” he said.