Tuesday, March 20, 2007

Small is beautiful in China’s burgeoning private equity market

The difficulties encountered by Carlyle, the US private equity group, in its struggle to acquire control of Xugong Construction Machinery, the Chinese state-owned construction machinery maker, should not deter private equity investors from shopping in China — the art is in buying small and “staying below the radar”, the FT says.

Amid mounting political pressure, Carlyle first reduced its intended investment from 85 per cent to a 50-50 joint venture. This week it scaled down its plans to a 45 per cent minority holding. But Volvo had no such trouble when it acquired a 70 per cent stake in Lingong Construction Machinery earlier this year, a company which makes similar products.

And new figures suggest the deal-flow remains robust. According to the Centre for Asia Private Equity Research, there were 120 completed venture capital and buy-out deals by foreign firms in China in 2005 with a combined deal value of $3.3bn. Last year, the completed deal flow had climbed to 141, with a value of $6.9bn - although the valuation figure was swollen by Goldman Sachs’ $2.8bn pre-IPO investment in Industrial and Commercial Bank of China. So far this year, there have been 22 completed deals with a value of $1bn.

Buying small is one way of avoiding regulatory problems. Indeed, Carlyle itself has been a pioneer of this strategy, making a number of $10m-$50m investments in China and elsewhere in Asia through its Asia Growth Capital Fund.

Investment funds have been taking advantage of new stock market rules that allow foreign investors to buy significant stakes in listed companies directly. Goldman Sachs announced three such investments in December, taking stakes of about 10 per cent in Fuyao Glass, Midea Electronic Appliances and Chengdu Yangzhiguang, a maker of aluminium foil.

Buy-out firms will also be given a new opportunity to invest in listed companies amid continuing reform of the shareholder structure of the Chinese market. Under the plan, a huge overhang of non-tradable shares is being converted into shares that can be bought and sold on exchanges. The lock-up period for selling those shares is gradually ending and some of the owners could be looking to unload stakes to financial buyers.

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.