Where's the Action In China?

January 29, 2008

For the past five years, private equity firms and other corporations have been using China as a cheap source of labor. The number of factories that have been set up by private equity-backed portfolio companies has grown substantially. Meanwhile, within M&A circles, there’s constant talk about dealmakers’ desires to target the country’s huge, largely untapped, middle class. Most industry experts believe there are scores of Chinese companies looking for foreign investment, and this June will mark the second annual ACG-sponsored China International Private Equity Forum.

According to one source, there are at least 300,000 small state-owned enterprises in China and millions of middle market privately owned companies, many ripe for investment. Adding to the country’s need for foreign investment is its lack of suitable exits for business owners. The Chinese stock market can only handle about 50 to 70 IPOs a year and lists about 1,500 companies at a time.

It seems like a no-brainer for U.S. private equity firms to put money to work in China, but of course it isn’t that simple. Doing a deal in China is a much more complex undertaking than a typical mid-market acquisition here in the States — or in Europe, for that matter. The government presents unique challenges for foreign investors, and I suspect financing is very difficult to obtain for a variety of reasons.

Thus far, the talk about how great the opportunities in China still heavily outweighs the actual dealmaking activity taking place. Some feel it’s more of a headache than the investment is worth at this time. That being said, I do believe there will be change in the region. The question is when?

I am writing about this for the next issue of M&A Magazine and would like to hear your take on cross-border activity in China. Please email me at danielle.fugazy@sourcemedia.com. Your comments can be kept off the record if you like.

Danielle Fugazy