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Tailor-made strategies: Buy and build or bet to win?

Updated: Nov 17, 2019

By Kenny NG

The M&A landscape and business environment in China has evolved from being opportunistic to systematic. But whether you are fund or a corporate, buy-and-build is the way to go.

It’s an age-old question in private equity / venture capital – buy and build or bet to win?

Eugene Ong, who leads business development for IHS Markit’s private markets division, speaks to three seasoned professionals – two fund managers and one corporate – on what works and what doesn’t for Asia’s largest economy.

Who dares wins.

Private capital investment in China over the last 15 to 20 years has undergone a period of significant transformation from a relatively opaque economy to a market-driven one today.

Michael Chen, Managing Director at Centurium Capital, a China-based consumer and healthcare focused private equity firm, believes the days of getting arbitraged deals are over. In the current business environment, a lot of resources are now required to be devoted towards managing the company and keeping a watchful eye on the day-to-day operations.

“China is undergoing a process of change for private equity – from a more opportunistic and one-off investment into a buy and build mode.”

Minority deals today still yield decent returns, but increasingly, control deals in the market are evolving from the traditional hardline approach on growth, to a softer stance involving the imparting of best practices and into portfolio companies.

Eddie Chen, Managing Director and Head of China at Eurazeo, a listed EUR 17 billion French private equity firm managing both its own balance sheet capital and third-party funds, commented that, having its roots in Europe, the firm also stands by a buy-and-build approach towards investing. However, Eurazeo adapted this strategy to the local market 10 years ago when it entered China through finding a balance between being overly conservative and aggressive in terms of deal making.

“Sometimes you have to be a little brave, especially coming from a European background - you can be very conservative. If you are too conservative, you may not be able to get a deal. If you are too aggressive, then it also goes against the business philosophy and culture.”

Ultimately, Eddie believes that the challenges for any international private equity firm to perform in China is to find that unique investing methodology that works.

Localization is key.

Adam Shen, Vice President at US based Danaher, leads the firm’s efforts in M&A in Greater China and North Asia, said that, as a corporate, the inherent philosophy is always to buy and build a business. Having completed more than 400 acquisitions globally since its establishment in 1984, Danaher today is focused on life sciences, diagnostics, environment and applied solutions. And unlike private equity funds that have a finite term and exit plan, the company acquires to integrate and grow.

“Unlike our private equity counter-parts, we have no LP-pressure or exit-pressure, but we have integration-pressures”.

Adam commented that China remains a key strategic market for Danaher. In addition to being a product sourcing destination, China has also been an active M&A playground for the firm with more than 10 acquisitions made over the past eight years. He strongly believes that a localization strategy is extremely important, even more so with the ongoing trade tensions, and said that the firm will not hesitate to move production from US in order to meet the demands from the domestic market.

No one-size-fits-all strategy.

Michael believes that the steep decline in RMB fundraising over the past 12-18 months indicates the need for more long-term capital to be put to work in organic and meaningful investments within the domestic market. He also sees a lot of funds in China and Asia mirroring the characteristics of more developed private equity markets, citing examples such as the integration of investment teams and operational teams that possess the relevant industry or consulting backgrounds. This approach allows the private equity firm to streamline the processes of value creation in their portfolio companies.

Eurazeo’s principles for investing in China also encompasses the need for a more long-term view as well as creating value for its 300+ portfolio companies in Europe and globally. Eddie says the value creation roadmap for companies getting exposure into the Chinese market comprises various structures such as joint ventures, acquisitions as well as greenfield developments, depending on the deal dynamics. There is no one-size-fits-all strategy, he said.

“You have to figure your own way, it’s very case by case.”

Notwithstanding the highly bespoke and potentially complex framework required to navigate the Chinese market, this practice has proven to have created significant value for Eurazeo’s companies based out of Europe. Furthermore, the firm has also started to work with local partners in China for a joint fund whereby the firm will act as the cornerstone investor along with other funds to link both European and Chinese companies.

Don’t destroy what you want to buy.

Beyond the operational issues, one of the biggest challenges for foreign investors entering Asia is the difference in mindset and culture. As a strategic investor, Danaher has a well-equipped operating team and turnkey resources in place to close the deal, but the challenge is always how to integrate the target company seamlessly and successfully.

“We don’t destroy what we want to buy. If there is a small Chinese company, you don’t kill that spirit with a multinational process during the integration.”

Eddie also said that Eurazeo, despite being a listed company investing out of its own balance sheet, adheres to the comparable standards of private equity investing such as having a typical investment horizon of 5 years and has consistently achieved a return on investment of approximately 20%. Within China, he said that a large part of those efforts is spent on identifying the winners in the market.

“Integration is always a challenge - the Chinese culture with the international or European culture. That challenge requires some unique methodology, and if you don’t do it well, you could end up with a really bad story.”

He also said that the Eurazeo's long-term philosophy towards investing is a successfully proven model . “As long as we adhere to having a long-term view, focus on value-creation and delivering on our five-year exit plan, we are usually quite successful.”

So, whether you are operating a private equity fund with a limited horizon and an exit plan; or managing a corporate organization with a buy-and-hold strategy, the litmus test of executing a successful acquisition always lies in the ability to not only integrate operationally, but also assimilate culturally.

This article is a curated transcript of the panel discussion session "Buy and Build or Bet to Win" at the Shanghai Summit of the Asia Investment Conference. Watch the full recording here.

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