Could China boost Italy's private equity activity?

In February 2017, Italy's highest state representatives travelled to Beijing alongside entrepreneurs and professional investors for the fourth Business Forum Italy-China. Italy's President Sergio Mattarella gathered with his Chinese peer, Xi Jinping, to boost the industrial co-operation between the countries and ink a memorandum of understanding worth €5bn that set forth several partnership agreements between companies from the two countries.

One of these partnerships saw Cassa Depositi e Prestiti Group (CDP) agree to sell a 40% stake of its portfolio company Ansaldo Energia to Shanghai Electric, a listed Chinese power generation and mechanical equipment manufacturer with a €5bn market cap. Following the sale, CDP retained a 45% stake in the business with the exclusive right to buy the remaining 15% stake from Leonardo-Finmeccanica from 1 July 2017.

The deal is the latest in a growing number of exit opportunities brought by Chinese investors for private equity players across Europe. Among the most relevant, in January 2017, Mid Europa Partners sold Hungarian broadband and telephone provider Invitel in a €202m secondary buyout to China-CEE Investment Co-operation Fund, an investment vehicle managed by CEE Equity Partners and partially funded by Chinese capital. In January 2016, Onex exited German processing equipment manufacturer KraussMaffei via a trade sale to ChemChina for €925m.

Against this backdrop, several GPs have recently launched Sino-European, or Chinese-backed vehicles, including Agic Capital, which held a $1bn final close for its debut fund in February 2017. Furthermore, investment firm China Everbright held a $264m first close for its maiden buyout vehicle targeting the US and Europe, CEL Global Investment Fund, in August 2016 and, in 2013, CEE Equity Partners launched a $500m vehicle partially founded by China Exim Bank.

"China is turning off the tap. The country is facing major challenges" – Alberto Forchielli, Mandarin Capital

A recent survey conducted by MVision Private Equity Advisers and the London Business School highlighted the expectations from the private equity industry of increasing competition from Chinese buyers over the next 12 months across multiple sectors.

Two thirds of the GPs surveyed confirmed they faced competition from prospective Chinese buyers more frequently over the past year, with 29% of deal-makers confirming they lost out to a Chinese contender in 2016. Additionally, the report highlighted that 76% of GPs believe that increasing Chinese outbound activity has an inflationary impact on valuations.

However, whereas the survey points out that Chinese buyers are gaining momentum, several market sources think this trend will reverse in 2017.

Contrasting scenario
Chinese M&A investments in Europe soared to €84.7bn in 2016, according to unquote" sister title Mergermarket, marking a huge increase from the then record-breaking €34.2bn reported in 2015 and €18.35bn in 2014. However, Italy saw a 90% drop in capital invested from 2015 to 2016 totalling 18 M&A deals in 2016 with €873m of total capital invested. In 2015, the country saw 11 transactions completed, which amounted to an aggregate €8.6bn.

The main reason unquote" sources anticipate a decline in Chinese investment stems from the Chinese government's recent U-turn in financial policy, which aims to limit outbound deals valued above $2bn. The bonanza seen in 2016 may decrease in 2017.

Furthermore, China is currently facing a slowing domestic economy and devaluation pressure on its currency, explains Alberto Forchielli, co-founder and managing partner at Sino-Italian mid-cap private equity house Mandarin Capital Partners. "China is turning off the tap," he says. "The country is facing major challenges. Nonetheless, the majority of large private equity deal-makers have offices in all of China's major cities and will still need deep relationships with this market."

While Italian private equity investors are currently enjoying plentiful supply of Chinese investment, this may not be the case in the longer term.

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