Chinese investors cautious about M&A, but private equity still hunting for long-term returns

In current environment, investors are keen on sectors that are more resilient and less cyclical, BDA Partners executive says
Private-equity dry powder has doubled to around US$600 billion in three years, and PE involvement in M&A has more than tripled, according to PwC

Mergers & Acquisitions

Mia Castagnone

Published: 12:30pm, 25 Sep 2022

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Chinese investors have become more cautious about merger and acquisition (M&A) deals because of economic uncertainties, but strategic and private-equity firms are still deploying capital in investments with long-term returns, industry observers said.

A slowdown in economic growth domestically, Beijing’s persistence with zero-Covid policies and geopolitical tensions have made investors cautious, said Anthony Siu Yanhong, a Shanghai-based partner at BDA Partners.

“In the current environment, investors are keen to invest in sectors which are more resilient and less cyclical,” Siu said, adding that high-quality assets with stable growth and profitability are still attracting strong private-equity interest.

Caution among Chinese investors is significant because China M&A deals made up more than half of such deals in Asia-Pacific in the first half of 2022, according to EY. Asia-Pacific M&A deal volumes are growing and its share of the global total continues to increase over time, according to a recent report by PwC.

China M&A deals to remain sluggish in second half of year, says PwC

This trend has been driven by sizeable private-equity dry powder, which has doubled to around US$600 billion in the past three years, PwC said. Private-equity involvement in M&A has more than tripled to nearly 40 per cent of all deals in the region, it added.

“There is a change of risk appetite, from chasing hyper growth to strong cash-flow businesses where they can withstand a prolonged period of economic slowdown and [which] will be in a strong position to gain market share when the global economy recovers,” Siu said.

02:24

Hong Kong can become M&A hub for mainland companies expanding overseas, says former regulatory head

Among the challenges that Asia-Pacific faces are high inflation, prolonged impacts of the pandemic and increased regulatory scrutiny, PwC said. China’s economy, meanwhile, faced a sharp slowdown amid ongoing citywide lockdowns to curb the spread of Covid-19, as well as quarantine restrictions on new arrivals.

The country’s post-pandemic recovery in 2021 did not last, and economic conditions suffered in the second quarter of this year due to the knock-on effects of lockdowns and supply-chain disruptions carried over from early in the pandemic. Depressed economic activity in Russia due to its war in Ukraine also played a part in this.

International buyers still find it difficult to do deals in China as a result of the travel restrictions, said BDA Partners’ Siu.

Hong Kong can also be a hub for Chinese overseas M&A: ex-SFC chief

“Market fluctuations do not alter the fundamentals of the Chinese economy, with a growing middle class willing to spend, and the economic transformation from traditional, low-cost manufacturing to advanced, technology-driven ones,” he added. “All these factors are drivers for M&A and investment activities in China.”

Earlier this year, Hong Kong-based Welkin Capital, which has about US$500 million in assets under management, said it was betting on small to medium-sized enterprises in China. Welkin said low valuations had created opportunities to invest in “little giants”, despite challenges posed by China’s strict Covid-19 policies.

“M&A activities have been more resilient this year,” said Hao Zhou, the Hong Kong-based partner and head of M&A practice for Greater China at Bain & Company. Attractive valuations during market downturns, especially in sectors such as hi-tech, healthcare and consumer products, have created many M&A opportunities, Zhou said.

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