It’s all on for “princeling”, “turtles” and even foreign private equity groups in China’s fast-growing buy-out industry, as Carlyle Group on Wednesday unveiled yet another agreement with a Chinese partner — this time to launch a local currency fund focused on smaller company investments.
Barely a month after announcing a deal with the Beijing municipal government to create a renminbi-denominated fund for local currency investments across China, Carlyle seems anxious to build on its carefully established foothold in the country.
The US buy-out group, as the FT reports, is teaming up with Fosun, China’s largest privately-owned conglomerate, to jointly sponsor a renminbi fund that will start with $100m of investment capital.
The local currency fund, though initially small, is designed to comply with China’s restrictions on use of dollar-based offshore funds to acquire local assets. And Carlyle undoubtedly has big plans in mind for its local China investments.
As an early starter in China, the US group has made about 50 investments so far representing total equity expenditure of about $2.5bn (excluding this week’s deal) — the biggest by a single foreign private equity group, according to the FT.
Having gained a clear edge on all other foreign buy-out groups, little wonder that Carlyle wants to keep it. As Lex noted last month, a Chinese entry strategy “is a much sought-after golden fleece for any company.”
At the same time, the challenges are daunting, as Lex and other critics have warned. Some big deals have been blocked by Beijing, citing competition grounds, including — notably — Coca-Cola’s $2.4bn bid for juice maker China Huiyuan.
Crucially, there is still great uncertainty about taxation and the structure of partnerships. While the authorities are expected to clarify the rules this year, as Lex adds, “even if these prove favourable, the entire process will move at a glacial pace.”
Perhaps in the most potent proof of Carlyle’s determination — and patience — the buy-out group hung in there after itself becoming a victim of Beijing’s regulatory zeal in mid-2008, when its painstakingly agreed $375m buy-out of construction equipment maker Xugong Group was scuttled.
So, if you’re in the Carlyle optimists’ camp on Chinese private equity, the timing looks good.
Indeed, just this week, news came that two of Carlyle’s key rivals, KKR and TPG, are in advanced talks to jointly buy Morgan Stanley’s 34.3 per cent interest in Chinese investment bank CICC — even as Bain Capital also pursues the deal.
The only potential issue, as the FT notes, could be Beijing’s discomfort at selling the stake to US buy-out groups.
Meanwhile, as foreign buy-out firms push for “in”, China’s sovereign wealth fund CIC is steadily expanding its global ambitions, as FT Alphaville noted recently.
Just over a week ago, the fund finalised the biggest injection of capital into the private equity secondary market, agreeing to invest $1.5bn through custom accounts with Lexington Partners, Goldman Sachs and Pantheon Ventures — three of the biggest specialists in buying second-hand buy-out and venture capital fund interests, reported the FT.
Meanwhile, domestic Chinese buy-out groups are fuelling a growing wave of M&A activity back home.
As the FT notes in a separate report:
For years the Chinese government in Beijing has been encouraging the creation of a homegrown private equity industry that could rival the dominance of US players such as Carlyle Group, KKR, Blackstone and TPG.
Last year, foreign groups still controlled about 80 per cent of the Chinese private equity market but Citic [Citic Private Equity Funds Management Co] is just the largest of a profusion of local funds that are now poised to snatch market share from the foreigners.
Well-connected fnds such as Citic PE and New Horizon Capital, co-founded by Winston Wen, son of Chinese premier Wen Jiabao, can, in the FT’s words, “help clear the murky and opaque regulatory path to a local listing in a way that foreign funds will never be able to”.
As one long-time foreign private equity investor in China told the paper: “Our main competitors are now princelings, sea turtles and the bosses of state-owned enterprises.”
“Princeling”, by the way, is the Chinese term for the well-connected child of a senior Communist Party official, while a “sea turtle” describes someone who lived abroad for an extended period and then returned to the country.
We’re just wondering what kind of names have been dreamed up for the likes of Carlyle, KKR and TPG.
Related links:
How to say “more please” in Chinese – FTAlphaville
CIC: the multi-purpose SWF – FTAlphaville
China’s ‘princelings’ and the PE – DealJournal
Chinese fund’s form gives it edge in turf war – FT