Analysis: Chinese private equity firms set sail abroad 30 Sep 11

Shanghai's new financial district skyline is seen from the opposite side of Huang Pu river, which is under re-construction as part of a city facelift for the upcoming 2010 World Expo, in Shanghai July 1, 2009

By Samuel Shen and Stephen Aldred

SHANGHAI/HONG KONG | Thu Sep 29, 2011 10:05pm EDT

(Reuters) – Flashed on the side of a building here in Shanghai’s historic Bund district, an image shows a giant ship named “Hony,” setting sail from China, traveling past the Statue of Liberty, past Big Ben, and bringing home crates of golden coins.

Hony Capital, the Chinese private equity firm the picture represents, hopes that someday soon, art imitates life.

After years of focusing on their home turf, Hony and other China funds are expanding abroad, slowly but steadily moving across Asia and into parts of the Western market.

The aim of the funds is high, with managers stating their hopes to compete for investment dollars as well as deal opportunities with western giants like Blackstone (BX.N), TPG TPG.UL and the Carlyle Group CYL.UL.

The barriers are high as well, as expanding overseas is always difficult, and the acceptance level of Western executives and fund of fund investors for Chinese players is still fairly untested.

Intense competition for deals at home, plus international ambitions of Chinese companies like consumer goods group Bright Food are fuelling the move to send China private equity businesses across borders.

Private equity executives in China stress the move is gradual, though whatever the speed, it’s happening.

“As the world’s most vibrant economy, China has attracted the world’s best companies, resources and wealth,” John Zhao, Hony Capital’s President said at the Shanghai ceremony earlier this month, attended by local government officials as well as scores of overseas institutional investors.

“Chinese companies have also started sailing abroad,” he said. “This is Hony’s opportunity.”

Hony is not alone in its international plans.

Citic Capital, owned by China sovereign wealth fund CIC and the state-backed conglomerate Citic Group, has a Japan fund and an international co-investment fund. The firm has done five deals in Japan and is closing in on a seventh deal in the United States.

In addition to seeking deals that they and Chinese corporations can take part in, the cross-border push of Chinese firms such as Hony, Citic and CDH has another motive: attracting overseas investors into their funds.

In luring money from Western institutions such as pension funds and banks, analysts say some Chinese firms have an advantage over their much larger global rivals due to their strength in the China market — an area the institutions want exposure to.

Some Chinese firms now have both a dollar and a yuan fund at their disposal, which gives them an advantage over firms with only a U.S. dollar fund.

Hony, a unit of Legend Holdings, has raised more than $2 billion in four dollar funds from investors including Goldman Sachs (GS.N), Temasek TEM.UL and Stanford University since 2003.

During the past two years, at least six home-grown Chinese firms, including Fortune Venture Capital and Jiuding Capital have launched or plan to launch their first dollar funds, according to Zero2IPO.

Highlighting the fundraising ability of Chinese firms, Citic Private Equity Funds Management Co raised $1 billion in May in its first dollar fund after attracting foreign demand.

The fund, which was heavily oversubscribed, obtained investment from 39 overseas institutions including sovereign wealth funds, pension funds, endowments, family offices and insurers.

Private equity research group Preqin estimates that there are 538 Asia and global funds on the road looking for a total $177 billion in capital. That broad array allows investors to be choosy about who they fund. And some are expected to still be cautious about the fast growing, heavily regulated and unpredictable China market.

INVESTMENT OPPORTUNITIES

Through launching dollar funds, many Chinese private equity and venture capital firms hope to win more deals from foreign rivals as many Chinese companies seeking an overseas listing prefer hard currencies funding.

For example, many Chinese internet companies including Baidu (BIDU.O) and Sina (SINA.O) used offshore structures to obtain foreign venture capital investments ahead of their Nasdaq IPOs to avoid rigid Chinese regulations.

Foreign-currency funding is also preferred by a growing number of Chinese companies seeking acquisitions abroad.

Hony, for example, helped Chinese construction and mining equipment maker Zoomlion (000157.SZ) in its acquisition of Italy’s Compagnia Italiana Forme Acciaio SPA.

According to sources close to the firms, Citic and CDH, along with newcomer Beikai Capital are eyeing buyouts of China’s so-called orphan stocks, companies listed overseas that may have been unfairly tainted by a raft of accounting and governance scandals from other Chinese companies.

The scandals have hammered stock values, and taking the companies private to relist in China offers a quick arbitrage play. Such a practice would require a dual-currency fund structure under which the dollar fund is used to acquire, and take private an overseas-listed company, transfer the interest into a yuan fund, before taking it public in mainland China.

“More and more overseas-listed Chinese companies are looking to come home, where they can fetch higher valuations and get more brand recognition,” Beikai partner Shuang Rongqing said. “I think that would the trend going forward.”

CDH Investments has $4 billion in domestic China assets under management. The firm recently teamed up on a take-private bid with TPG Capital for Nasdaq listed CNInsure Inc (CISG.O), though that bid collapsed.

Industry insiders say working with TPG on the deal gave CDH vital experience of U.S. buyout processes.

And partners at international funds are watching the firm overseas. They believe CDH’s Singapore office will give the firm a role in Indonesia, where China’s SOEs are actively hunting assets.

“It’s very clear from our conversations that it’s a matter of time before Chinese institutional investors make big allocations for outbound investments,” said Patrick Walujo, partner at Northstar on a panel, discussing Indonesia.