Lazy days are over for buyout barons in China

Uxin

16/01/2020 03:15

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Alec Macfarlane
    HONG KONG, Jan 16 (Reuters Breakingviews) - Kettles and
widgets will be the new focus for buyout barons in China.
Financiers were notably gloomy on Wednesday at an annual powwow
organised by the Hong Kong Venture Capital and Private Equity
Association. As growth slows in the mainland and tech
bets sour, funds can no longer rely on passive minority stakes.
The next batch of investors will have to work harder to earn
decent returns. 
    Private equity in China took a beating in 2019. Investments
plunged 63% to $9.5 billion, according to Dealogic, as trade war
tensions ramped up and new regulation made fund managers warier
of investing. Just 12 exits were recorded, the worst year for
sales in a decade. 
    The hangover in tech, where many firms bet on an easy ride,
was particularly painful. Shares in Uxin  UXIN.O , a loss-making
used-car sales startup backed by TPG and Warburg Pincus, are
trading at less than one third of their 2018 listing price. A
Chinese subsidiary of U.S. office-sharing outfit The We Company
that Hony Capital invested in is also struggling. 
    A disappointing year gives dealmakers more reason to change
their ways. Private equity investors in China have long resorted
to buying small, passive stakes in companies and relying on GDP
growth to boost returns, as owners have been reluctant to give
up much in the way of control or influence. Pamela Fung of
Morgan Stanley Alternative Investment Partners notes many
investors have simply been riding companies until they go
public, and predicts more diverse styles of investing in the
years ahead.
    One option is to spend more time trying to replicate KKR's
 KKR.N  success with its 2014 bet on white goods maker Haier.
Although it only had a 10% stake, a board seat gave it a say in
operational improvements and M&A. Haier’s share price more than
tripled in the next four years. 
    Dealmakers can look to more established markets like Europe,
where managers like EQT and Triton are making 20%-plus
annualised returns from carving out unloved divisions of
industrial conglomerates in countries that are barely growing.
The time is coming when success for private equity in China
might not look so different. 
    On Twitter https://twitter.com/AlecMac11

    CONTEXT NEWS
    - The Asia Private Equity Forum, organised by the Hong Kong
Venture Capital and Private Equity Association (HKVCA), was held
in Hong Kong on Jan. 15.
    - For previous columns by the author, Reuters customers can
click on  MAC/ 
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HKVCA event link    https://www.hkvca.com.hk/en/events/APEF20.aspx?ECatg=01-UE
BREAKINGVIEWS - Asia Pacific is primed for its next 11-digit LBO
    urn:newsml:reuters.com:*:nL4N28G1RL
BREAKINGVIEWS - Buyout barons’ debt machine will blow a gasket  
  urn:newsml:reuters.com:*:nL8N28L085
BREAKINGVIEWS - TPG’s Asia fundraising is a sign of buyout times
    urn:newsml:reuters.com:*:nL3N208133
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 (Editing by Una Galani and Katrina Hamlin)
 ((alec.macfarlane@thomsonreuters.com; Reuters Messaging:
alec.macfarlane.thomsonreuters.com@reuters.net))