March 27, 2020 / 6:33 AM / in 9 days

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

HONG KONG (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.

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 (1.07 billion pounds) 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.

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

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