23 August 2019
With founders preparing to hand over reins to a new generation, companies in China will be more open to partnerships with private-equity firms. Photo: Ta Kung Pao
With founders preparing to hand over reins to a new generation, companies in China will be more open to partnerships with private-equity firms. Photo: Ta Kung Pao

China PE window to open wider as new generation steps in: survey

Demographic changes in China will create opportunities for private-equity firms to enhance their involvement in the country, although the market overall remains the most challenging place to navigate in Asia, according to a survey by AlixPartners, a global business advisory firm.

A founder who has grown his company from scratch tends to resist the idea of giving up equity and be strategically led by outsiders. But as such people, who started their businesses 25 or 30 years ago, approach retirement age and hand over reins to a new generation, companies would be more willing to part with some equity and rope in partners.

In some cases, the scions do not want to take over family businesses, preferring to pursue other work. That will also provide room for private-equity investors to strike deals, including potential buyouts, AlixPartners said after a survey of general partners (GPs).

With new thinking, management may “become more open to know-how and efforts that will professionalize the company, help it grow, and provide an exit for the founder,” the consultancy said.

Some GPs said there are very few deals at present that can be described as buyouts in China.

“Operational capabilities of private-equity funds are not very applicable in China, especially when very few deals are control deals,” said Sun Dayi, managing director at Shanghai-based fund of funds Jade Invest.

Besides, as many companies in China are state-owned, they do not bother much with market realities, making the market more challenging than elsewhere in Asia.

AlixPartners conducted its survey in early 2014, interviewing 96 general partners all over the world that have made minority or control-investments across Asia. The respondents had assets under management ranging from US$750 million to more than US$5 billion.

India and Indonesia were identified as the second and the third most challenging countries for private-equity funds, as their economies are dominated by businesses run by local influential families.

Turning to sectors, those that demand the most operational focus are manufacturing and retail as they require running complex product supply chains and have more moving parts than other sectors, which lead to more areas for optimization.

But the internet, media and technology sector which has become an attractive industry particularly in China fell to the middle ranking as those companies are asset light. 

Value creation

Private-equity is entering a new phase in which creating value through operational excellence will be the way to build a competitive business, and will thus be important in meeting return expectations and ultimately in raising new funds, AlixPartners said.

Revenue enhancement and cost reduction are the two most significant tactics that GPs consider in their value creation strategies as they need to out-compete rivals and improve efficiency.

“Most operational value-add in China is limited to accounting or tax standardization, resource sharing, business development and talent recruitment,” Sun said.

Maintaining good relationship with the founder is also important for minority-stake investment, according to 61 percent of the respondents, while other GPs prefer controlling stakes or to negotiating terms that provide meaningful influence, or finding some other alternatives, such as focusing value creation efforts on companies with more than one owner.

Chris Freund, founder of Mekong Capital in Vietnam, has found it easier to make operational improvements in portfolio companies with two to five founders. “As long as we are one of the two largest investors and no single investor owns more than 50 percent, we exercise a lot of influence,” he said.

Other challenges include hiring more operational partners and keeping know-how in house, the survey showed. “In Asia, relationships with people are often very important for successful operational improvements, hence it helps if the same people do the whole process consistently,” said Naoto Mizoguchi, managing director of Japan’s DRC Capital Ltd.

– Contact the reporter at [email protected]


Ayishah Ma is a financial reporter on Greater China issues.

EJI Weekly Newsletter

Please click here to unsubscribe