One of the prevalent themes of the Chinese market this year has been the increased competition private equity (PE) firms have experienced in mergers and acquisitions in the Greater China region.
With corporates bidding aggressively for target companies, we have seen valuations pushed to lofty levels.
Under pressure to continue to grow revenue and market share, industry leaders such as Alibaba, Baidu and Tencent, to name a few, have been especially active this year.
Strategic acquirers have not only been competing for the same targets but also making dominant or controlling late-stage investments in many PE-backed portfolio companies in several cases.
This tends to create tension and uncertainty for potential exits because private equity firms and strategic acquirers may have different investment horizons and agendas.
However, if the initial public offering market remains volatile next year, the pressure for portfolio companies to consolidate and seek M&A opportunities will only increase.
With a lot of dry powder, deal appetite will remain strong among PE firms but finding opportunities to deploy their capital will continue to present a challenge next year.
Corporates will continue their M&A growth strategies and drive up valuations.
In this heated environment, we are likely to see disciplined PE firms keep active by expanding their sector focus and pursuing bolt-on acquisitions to existing portfolio investments.
Simultaneously, another rising trend has been that of domestic private equity fueling the resurgence of Chinese companies announcing plans to delist from the US this year, with the majority seeking to relist in China.
Volatility in the Chinese stock market put many of those privatization bids in doubt but the market has stabilized in the past three months and a number of previously announced transactions have reached agreement and received the green light from shareholders.
Looking ahead to next year, we expect this trend to continue and even surpass the number of “going private” transactions in 2015, which have reached 34 deals to date.
The TMT (technology, media and telecom), healthcare and alternative energy sectors are once again likely to lead the way in this respect.
Sohu’s recent announcement has arguably set the tone for what could be a very active period for “going private” transactions early next year.
One of the notable aspects of the resurgence of the US-listed, China-bound private transactions has been the domestic nature of the acquiring parties, including various domestic strategic and financial parties.
This contrasts with what was formerly a transaction type led by international private equity sponsors.
We also expect this trend to continue.
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