Chinese companies investing overseas are increasingly buying businesses with technology, brands and know-how as they move up the value chain and counter falling margins at home, private equity fund A Capital said.
Europe, the top destination for Chinese investment last year, will remain attractive due to moderate valuations, the absence of regulatory hurdles and the “strategic match” with areas of interest to China such as services, A Capital, a Brussels- and Beijing-based fund backed by China’s sovereign wealth fund, said in a report released today.
China, which holds $3.4 trillion of foreign-exchange reserves, is encouraging businesses to invest overseas to secure energy and commodity resources, open factories and buy technology. Mainland companies will spend an additional $600 billion in other countries by 2016, A Capital said, while the Economist Intelligence Unit estimates China will be a net investor in the world economy by 2017.
“This is a major trend and investment is growing twice even three times as fast as economic growth,” Andre Loesekrug- Pietri, founder and managing partner of A Capital, said in a telephone interview. “But when you look at the numbers, they are still quite small and the track record for Chinese companies investing abroad has been relatively poor.”
Chinese companies’ outbound investments rose 14 percent to $77.2 billion last year, with mergers and acquisitions accounting for $37.8 billion, or 49 percent of the total, up from 44 percent in 2011, according to data compiled by A Capital.
Excluding tax havens, China now holds the No. 3 spot in global outbound investment rankings, behind the U.S. and Japan, up from 16th place in 2011, according to the EIU. It put investment outflows last year at $115 billion.
Spending by mainland firms in Europe jumped 21 percent to $12.6 billion last year, A Capital data showed, with deals including Bright Food Group Co.’s acquisition of 60 percent of cereal maker Weetabix Ltd., China Investment Corp.’s purchase of 10 percent of London’s Heathrow Airport and Sany Heavy Industry Co.’s takeover of Putzmeister Holding GmbH, Germany’s largest concrete-pump maker.
Investment into the U.S. rose 48 percent to $5.4 billion last year, accounting for 14 percent of Chinese outbound mergers and acquisitions, while spending in Asia dropped 65 percent due to a lack of large deals, A Capital said.
“Chinese companies see margins being squeezed by higher costs,” Loesekrug-Pietri said. “So if you are in the industrial sector, in the automotive sector, either you develop the technology in-house or you try to acquire it. It’s the same story with consumer goods.”
Sany’s purchase of Putzmeister “was because they had so much competition at home, that acquiring a high-end cement-pump maker in Germany will help them and make a difference in China,” he said.
The growing role of non-state-owned enterprises in overseas investment is contributing to a shift in spending away from developing countries toward developed economies that provide new markets in addition to technology and brands, the Economist Intelligence Unit said in its report last week.
Seven of the top 10 investment destinations for Chinese companies are members of the Organization for Economic Cooperation and Development, it said.
The value of Chinese outbound-investment deals last year involving minority stakes was $21.9 billion, outpacing the $15.9 billion of takeovers and representing an “important strategic shift,” according to A Capital’s report.
The trend shows that Chinese companies are becoming more sophisticated and have learned from the experiences of firms who saw their deals blocked by regulators or fail due to management issues, Loesekrug-Pietri said.
Investors “realize that they are little known and have so little soft credit among various stakeholders -- local investors, the unions, the media,” he said. “It’s still complicated for these private firms with little management expertise to go out, so if you take a minority stake, you don’t need to manage the whole operation.”
--Nerys Avery. Editors: Scott Lanman, Rina Chandran
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