TheChek News Flow

• Leverage ratio lower than US peers

• One Belt One Road opportunity in CEE

• CFIUS concerns thwart Chinese investments in US

Chinese private equity firms are increasingly seeing buyout opportunities in the European mid-market space amid concerns that the US government has taken a hard line on trade and investments with China, according to several private equity sources.

Last week, US President Donald Trump proposed tariffs of 25% on up to USD 60bn of Chinese goods, partly in retaliation for China allegedly abusing US intellectual property rights, as reported. He has, however, suggested that the US could reconsider the proposal based on discussions with China.

The move follows the Trump administration’s support for bills in Congress to broaden the US government’s power and strengthen foreign investment rules amid concerns over Chinese companies’ attempts to acquire US technology firms.

“We are increasingly directing our attention from the US to Europe…Europe is more lenient than the US in terms of regulatory concerns,” Yitian Luo, managing director at YunFeng Capital, a Chinese private equity fund backed by Alibaba’s Jack Ma, said last Thursday during a cross-border M&A forum hosted by Shanghai-based investment bank DealGlobe.

“We are not scared by CFIUS (Committee on Foreign Investment in the US), as there are plenty of opportunities in Europe,” Chairman of GSR Capital Sonny Wu told this news service. GSR Capital, a Chinese private equity fund specialized in clean energy and electric vehicle investments, had its USD 3.3bn acquisition of Lumileds, a US lighting division of Koninklijke Philips [NYSE:PHG], blocked by CFIUS in 2016.

Leverage in Europe’s mid-market space is much lower than its peers in the US as companies in Europe have exploited cheap debt amid quantitative easing. There are some family-owned companies in Europe that have never introduced private equity investors, while many US companies may already have private equity backers and therefore difficult to add further leverage, Luo said.

Sectors such as energy, information technology, basic materials, industrials, and retail in Europe are less leveraged compared with its counterparts in the US, according to a research report from BofA Merrill Lynch last March.

Lin Feng, founder and CEO at DealGlobe, during the same forum last Thursday noted that when family-run corporations do not have a next generation to succeed them, their best option is to sell the companies. There are many entrepreneurs in Germany and the UK between 50 to 70 years old who are facing succession issues in the next 10 years. A company with an annual profit of CNY 1bn (USD 159m) would be very attractive [to Chinese buyers], according to Feng.

The potential trade war between the US and China will likely accelerate the pace of Chinese companies seeking new export markets, and Central and Eastern Europe along the One Belt One Road provides opportunities for Chinese investment funds to invest in infrastructure, high-tech manufacturing and consumer goods sectors, the source said.

Compared to the US, Europe is heavily focused on manufactured goods and trade is better complemented with China’s market needs especially in utilities and energy, automobile, transportation and machinery-related sectors, the private equity source said.

“The deals there [in CEE] are less crowded,” the private equity source added.

“We think in Europe, family-run corporations still bring about huge opportunities. And European companies need the Chinese market. They need Chinese buyers to bring their companies to the next level,” according to Feng.

In November 2016, China set up a CNY 10bn investment fund called Sino-Central Eastern European Fund backed by ICBC that focuses on projects in Central and Eastern Europe for sectors such as infrastructure, high-tech manufacturing and consumer goods, as reported.

“We are fairly pessimistic about the North American market in the future. The US government has rejected a huge number of projects,” Feng said. The unpredictable policy environment under Trump’s administration is greatly discouraging investors from making acquisitions in the US, he noted.

CFIUS has scotched a string of US acquisitions, particularly from Chinese investors over concerns that China would transfer US technology know-how overseas.

In late 2017, legislation was introduced that sought to broaden CFIUS’ jurisdiction. The “Foreign Investment Risk Review Modernization Act of 2017” as currently drafted would expand the US government’s review of transactions in potentially sensitive sectors such as artificial intelligence, robotics, autonomous vehicles and cybersecurity creating mandatory filing requirements for investors with government ownership, and applying entirely new controls on technical collaboration between US and non-US companies, as reported.

In February, US regulators stopped Chinese state-backed group Sino-IC Capital, backed by China Integrated Circuit Industry Investment Fund, from acquiring Xcerra, a Massachusetts-based provider of equipment for testing computer chips and circuit boards.

Meanwhile, last September, Trump’s administration blocked the proposed USD 1.3bn acquisition of New Jersey-based chipmaker Lattice Semiconductor by Canyon Bridge Capital Partners, which is wholly backed by the Chinese government, as reported.