Private equity readies for surge in China buyouts on virus, succession woes

Topsports International Holdings

27/03/2020 06:09

By Julie Zhu
    HONG KONG, March 27 (Reuters) - Private equity groups are
beefing up warchests and hiring investment professionals to tap
an expected buyout boom in China following the coronavirus
outbreak and as founders in some traditional businesses execute
succession plans.
    The coronavirus pandemic has weighed heavily on the Chinese
economy, pulverising its industries such as entertainment,
catering and tourism. But new daily cases in China are sharply
down from February and economic activity has restarted, raising
hopes the economy is on the road to a recovery.  urn:newsml:reuters.com:*:nL4N2BK068
    That scenario has left private equity dealmakers, many of
whom are already flush with cash, licking their lips at the
possibility of scooping up deals.
    "The best deals are often done after this kind of crisis,"
said David Liu, founding partner of China-focused private equity
firm DCP Capital. "After the end of the virus outbreak, we'll
see more interesting investment opportunities at more attractive
valuations and terms."
    China-focused buyout funds have already raised $6 billion so
far this year, compared to just $1.3 billion over the same
period last year, according to data provider Preqin.
    DCP, which in 2019 raised over $2 billion for its debut U.S.
dollar fund, plans to raise a similar but bigger one later this
year, said sources. DCP declined to comment.
    Chinese private equity firm Centurium Capital is set to, in
the coming weeks, reach the first close of fundraising for its
second private equity fund with about $2 billion.  urn:newsml:reuters.com:*:nL4N2AZ1CS
    Co-founded by David Li, the former head of Warburg Pincus
Asia Pacific, Beijing-based Centurium also plans to hire
investment specialists and open an office in Shanghai in the
second quarter of 2020.
    Private equity's moves are also being driven by a trend of
China's ageing entrepreneurs increasingly willing to entrust
their businesses to them.
    It has so far been mostly limited in China to only minority
stakes, a model frowned upon by global giants such as Apollo and
Blackstone in the West as it does not offer them control of the
businesses. 
    But a growing number of Chinese entrepreneurs who built
their fortunes in the industrial, manufacturing and textile
industries are seeking buyers for their businesses rather then
handing them to their offspring. 
    "Many of the second generation are either not interested in
or not capable of taking over the business, which will lead to
plenty of buyout opportunities in China," said Hu Xiaoling, a
founding partner at CDH Investments, one of the country's oldest
private equity firms.
    Hu estimated that between 70% and 80% of China's private
enterprises that were founded in the 1990s would be short of
qualified or dedicated successors.
    As a result, family founders are becoming more open to the
involvement of private equity that have strong operational
capabilities. 
    "That's the major reason for the buyout firms to come in,"
said Houston Huang, head of global investment banking for China
at JPMorgan Chase & Co. "Founders are more willing to have the
discussions and consider giving up the controlling stake."
    According to Preqin, private equity-backed buyout deals in
China totalled $13.3 billion last year compared with just $1.3
billion in 2005.
    DCP's Liu said he worked on about one buyout opportunity in
every 10 deals more than a decade ago when he was co-head of
KKR's Asia private equity business. Now, he says, over half of
the deals he works on involve the potential for control.
    
    GOOD FIT
    The smooth conclusion of some marquee buyouts - like the
$6.8 billion deal of large Chinese shoemaker Belle International
- has also given confidence to entrepreneurs to adopt that
route.
    In 2017, CDH banded together with peer Hillhouse Capital for
the deal, the largest buyout in Hong Kong that year, after which
a number of younger mid-level executives were promoted to senior
roles while over 20 older early shareholders retired, according
to Hu. The company also in October last year listed its
sportswear business - Topsports International  6110.HK .
    Belle was long run by two elderly entrepreneurs - founder
and chairman Tang Yiu and CEO Sheng Baijiao - who considered
passing the business on to the founder's family but eventually
opted for a sale.
    "In China when the founders sell their companies, it's like
marrying off their daughters. You have to win their trust," said
Liu. 

 (Reporting by Julie Zhu in Hong Kong; Editing by Jennifer
Hughes and Muralikumar Anantharaman)
 ((julie.zhu1@thomsonreuters.com; +852 2843 6519; Reuters
Messaging: julie.zhu1.thomsonreuters.com@reuters.net))