China Exit or Co-Investment Opportunities for German PE Investors


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L.E.K.'s Karin von Kienlin recently presented at BVK on a study conducted by L.E.K. Munich and Shanghai. They wished to:
- Understand developments in Chinese equity investments in both the domestic China / pan-Asian market and cross-border investments between China and Germany / Europe
- Identify trends in likely future investment behavior and its drivers
- Defining success factors both for Chinese and German investors / corporates as to how to benefit from the potential opportunities of cross-border investments and cooperation

Learn more in the presentation here.

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China Exit or Co-Investment Opportunities for German PE Investors

  1. 1. Bangkok BVK Beijing Boston Chennai China Exit or Co-Investment Opportunities for German PE Investors Chicago London Los Angeles Melbourne Milan November 26, 2013 Mumbai Munich New Delhi New York Paris São Paolo San Francisco Seoul Shanghai Singapore L.E.K. Consulting GmbH, Neuturmstr. 5, 80331 München T: +49 (0) 89 922005-0 F: +49 (0) 89 922005-20 Sydney Tokyo Wroclaw © 2013 L.E.K. Consulting LLC. All rights reserved.
  2. 2. Agenda Agenda  Introduction  Macroeconomic backdrop  Co-investments and Exits CONFIDENTIAL 1
  3. 3. Introduction L.E.K. Consulting is a leading global strategy consulting firm Overview Global Network Founded in 1983, with a presence in Germany since 1988 and China since 1998 San Francisco Chicago Los Angeles Boston New York London Paris Milan Wroclaw Munich Seoul Beijing New Delhi Mumbai Chennai Assists senior executives to consistently make better decisions, deliver improved business performance and create greater shareholder returns Tokyo Shanghai Bangkok We have advised German Mittelstands clients on development and exit in China in the context of growth strategy and succession Singapore São Paolo* Areas of expertise include growth strategy, transaction support and value enhancement Sydney Melbourne Our Chinese colleagues advise clients at multinational companies in and outside of China, Chinese companies, private equity firms, and government entities CONFIDENTIAL 2
  4. 4. Introduction Introduction  This document summarizes results of a study conducted by L.E.K. Munich and Shanghai  The goals of the study are to - Understand developments in Chinese equity investments in both the domestic China / pan-Asian market and cross-border investments between China and Germany / Europe - Identify trends in likely future investment behaviour and its drivers Defining success factors both for Chinese and German investors / corporates as to how to benefit from the potential opportunities of cross-border investments and co-operation  The study is based on - Discussions with 50 representatives of senior investment and corporate professionals in Shanghai, Beijing and Hong Kong - Project experience Extensive secondary research CONFIDENTIAL 3
  5. 5. Agenda Agenda  Introduction  Macroeconomic backdrop  Co-investments and Exits CONFIDENTIAL 4
  6. 6. Macroeconomic backdrop While Germany’s population is expected to continue to decrease, China’s population is forecast to continue to grow at 0.5% p.a. China’s population (2005-2018f) Germany population (2005-2018f) Billions of people Forecast CAGR% (2005-12) (2012-18f) Billions of people Forecast CAGR% (2005-12) (2012-18f) 1.4 1.4 (0.1) (0.1) 0.5 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.5 0.0 200506 07 08 09 10 11 12f 13f 14f 15f 16f 17f 18f 200506 07 08 09 10 11 12f 13f 14f 15f 16f 17f 18f Source: IMF CONFIDENTIAL 5
  7. 7. Macroeconomic backdrop The increasing urbanisation and prosperity of the Chinese population will create massive middle-class demand by 2020 Age distribution (2012E) Share of rural population (2005-15) Percent 100 9 21 Percent 65+ 100 80 China 80 60 74 66 40 Germany 60 15-64 40 20 20 13 17 Germany 0-14 China 0 0 2005 06 07 08 09 10 11 12 13 14 15 Share of urban households by annual household income in China* Percent 100 147m 226m 0 1 2 6 ΔPPT (2005-10) (2010-20) 328m 6 2 4 51 Mainstream (USD16k-USD34k) 5 45 36 Value (USD6k-USD16k) Affluent (>USD34k) 80 60 63 82 40 20 36 10 0 2000 7 2010 Poor (<USD6K) 19 (46) (26) (3) 2020 Note: * In real 2010 dollars; in 2010, USD1=RMB6.73 Source: IndexMundi; L.E.K. research and analysis CONFIDENTIAL 6
  8. 8. Macroeconomic backdrop China’s GDP only overtook Germany’s in 2007 but is now more than double and expected to grow at c.10% until 2018 Germany nominal GDP (2005-2018f) China nominal GDP (2005-2018f) CAGR% (2005-12) (2012-18f) CAGR% (2005-12) (2012-18f) Trillions of USD Trillions of USD 16 Forecast 3.0 16 2.6 14 14 12 12 10 Forecast 10 14.9 20.3 10.6 13.5 12.2 11.0 10.0 9.0 8.2 8 8 6 6 7.3 5.9 4.5 4 2.8 2.9 3.3 3.6 3.3 3.3 3.9 4.0 3.6 3.4 3.6 3.7 3.7 3.8 4 3.5 2.3 2 2.7 2 0 5.0 0 200506 07 08 09 10 11 12 13f 14f 15f 16f 17f 18f 200506 07 08 09 10 11 12 13f 14f 15f 16f 17f 18f Source: IMF CONFIDENTIAL 7
  9. 9. Macroeconomic backdrop China has a much larger working population however continues to be much less industrialised and service oriented… Share of employees employed in selected industries 2010 Percent 100 427m  17m Utility Trade The Chinese population in employment in 2010 amounted to 761m - Post, Telecom and Transport Mining and extraction 80 Metals Industrial about half of the population worked in the industries/ company categories under analysis Healthcare and Pharma 60  Consumer Construction Chemicals The remainder worked among others in such industries/ company categories as - small producing enterprises (sales below c.€600k ) - public administration, including defence - Automotive 40 finance and insurance Agriculture 20 education, science, technology and art 0 China Germany Source: L.E.K. research and analysis CONFIDENTIAL 8
  10. 10. Macroeconomic backdrop ... with per capita output continuing to be much lower than in Germany Germany nominal GDP per capita (2005-2018f) Thousands of USD 44 40 34 CAGR% (2005-12) (2012-18f) Forecast 50 40 China nominal GDP per capita (2005-2018f) 46 44 45 44 40 41 47 48 49 3.1 2.8 Thousands of Euros Forecast CAGR% (2005-12) (2012-18f) 19.7 50 9.9 42 40 35 30 30 20 20 10 10 3.7 4.4 2.6 3.4 1.7 2.1 0 6.6 7.3 5.4 6.1 8.0 8.8 9.7 10.7 0 200506 07 08 09 10 11 12 13f 14f 15f 16f 17f 18f 200506 07 08 09 10 11 12 13f 14f 15f 16f 17f 18f Source: IMF CONFIDENTIAL 9
  11. 11. Macroeconomic backdrop An important driver of Chinese growth will be productivity improvements Output per employee by industry 2010 Thousands USD per employee 240 China 180 Germany 120 60 0 Food & beverages Chemicals Pharma Basic metals Medical & Surgical equipment Transport equipment Electricity, gas & water Industrial Construction production (exc construction) Transport & storage Consumer goods Output by industry in trillions USD 103 110 23 183 1 117 102 1647 249 101 354 China 43 39 19 25 3 89 54 54 97 103 110 Germany Source: L.E.K. research and analysis CONFIDENTIAL 10
  12. 12. Macroeconomic backdrop Germany still maintains a technological edge while China is catching up in the number of patent applications (not all of which may qualify as true innovation) Patent applications published by industry over 2000-2009 Thousands of patent applications China 500 Germany 400 300 200 100 0 Chemical Communication and Computers Consumer goods Industry Pharma and Medical Source: L.E.K. research and analysis Transport Other CONFIDENTIAL 11
  13. 13. Macroeconomic backdrop Summary observations  China continues to be an important market for German companies - Continued population growth Attractive young demographic with lots of demands Increasing urbanisation Increasing per capita income and prosperity Appetite for Western consumer brands and high tech products  China is orienting towards the West - Still very much an agricultural society with relatively small but growing industrial and services sector Improving productivity – but long way to go Working on R&D and innovation – partial catch up but still major gaps Combining China market demand with German market “supply” can be a powerful investment thesis CONFIDENTIAL 12
  14. 14. Agenda Agenda  Introduction  Macroeconomic backdrop  Co-investments and Exits CONFIDENTIAL 13
  15. 15. Co-investments and exits While still focused on Asian investments, in particular Chinese PE firms have raised increasing fund sizes and are open to international investments  US and European private equity funds have been investing in China for years and have dominated the market  However, local funds are catching up in number (c.130 local funds), size (raising single digit billions by fund) and in competitiveness (international training, local knowledge and connections)  The investment focus continues to be China or pan-Asia, however portfolio diversification and attractive investment opportunities in the West are driving initial cross-border investments  Investments tend to be out-right acquisitions, usually led by large, often state-owned Chinese corporates; - However, co-investments with Western players or minority stakes in corporates with the goal of driving China market development for that company are common in PE  The main deal rationales for such deals is the synergy value derived from - a valuable Western consumer proposition / brand leading Western technology Western market access global competitive benefits from acquiring a leading Western player CONFIDENTIAL 14
  16. 16. Co-investments and exits Chinese private equity firms have reached large sizes and have become credible bidders in international auctions Top-10 Private Equity companies headquartered in China and Hong Kong Name Headquarters Asset under management ($bn) Focus of investments 1 CDH Investments Beijing 8.0 Mainly China 2 Hony Capital Beijing 7.1 Mainly China 3 PAG Hong Kong 7.0 Mainly Asia 4 RRJ Hong Kong 5.8 China ,South East Asia, some US and Europe 5 Baring PE Asia Hong Kong 5.0 Mainly Asia 6 CITIC Capital Beijing 4.6 Mostly China, Japan, US and Europe 7 Affinity Equity Partners Hong Kong 4.0 Mainly Asia 8 Unitas Hong Kong 4.0 Mainly Asia, some Europe 9 SAIF Hong Kong 3.5 Mainly Asia 10 IDG Capital Partners Hong Kong 2.5 Mainly China, some Europe Source: L.E.K. research and analysis CONFIDENTIAL 15
  17. 17. Co-investments and exits Several new focus industries selected by the China State Council for future development might represent an opportunity for Western PE when exiting Old pillar industries New strategic and emerging industries National defense Energy saving and environmental protection Telecommunication New energy (nuclear, solar, wind, and biomass) Electricity Clean energy vehicles (PHEVs and electric cars) Oil New materials (special and high performance composites) Marine shipping Many industries directly contribute to China energy and environment goals Biotechnology Airlines It is specifically targeting for China to become world leaders within the 12th 5 year plan  High-end manufacturing In September 2010, The State Council, China’s cabinet, selected seven national strategic industries that it hopes will advance the nation’s economic development and also better serve internal demand  Coal  Next generation information technology Source: Stake Council, NRDC, L.E.K. analysis CONFIDENTIAL 16
  18. 18. Co-investments and exits Only a couple of weeks ago, the 3rd plenary session of the CPC Central Committee is seen to further open up the Chinese economy  The Third Plenum of each Central Committee is often the time for revealing massive changes in economic policy and the launching of political reforms  There have been two particularly significant Third Plenums in the history of the People’s Republic of China: - the 1978 Third Plenum of the 11th Central Committee, held two years after the death of Chairman Mao Zedong, ended the Cultural Revolution and launched the “reform and opening up of China” under Deng Xiaoping - and the 14th in 1993, held under Jiang Zemin, set the stage for China’s transition to a socialist market economy and led to more aggressive economic reforms promoted by Zhu Rongji  President Xi Jinping and Premier Li Keqiang have presented a series of new policies intended to boost the China market  The eight key areas that the Plan especially addresses include:  cutting administrative approvals promoting competition as well as free flow of international and domestic trade and investments land reform opening up banking including the liberalisation of interest rates and the exchange rate reforming the fiscal system including setting up basic social security reforming state-owned enterprises promoting innovation including green technology opening up the services sector Within these, the Plan has identified three major breakthrough sectors: - lower market barriers to attract investors and boost competition setting up a basic social security package allowing collectively-owned land to be traded CONFIDENTIAL 17
  19. 19. Co-investments and exits Cross-border deals with DACH targets funded by the Chinese are increasing; most are lead by Chinese corporates, often with an intransparent shareholder structure Selected Chinese investments into DACH region by bidder type (2008-13)  Number of deals - 16 16 14 Chinese investment in Germany is driven by SOE*s and more recently by PE, and POE** 13 12  10 10 However, definitions can be blurred as corporates often are part-owned by government or have an intransparent shareholder structure Investments were largely made into automotive, industrial products companies: more known cases included 8 - KSM, Preh, Sellner, ATB, Kiekert, FbZ Formenbau, Steyr Motors 6 - Kion, Putzmeister, Flex, KSL Sondermaschinen, Oerlikon Textilmaschinenkomponenten Government 4 2 Private Investor* 3 Private Equity 2 Corporate 1  - 0 2008 Other sector targets include IT and RCG 2009 2010 2011 2012 Medion, Eterna 2013***  Note: * state owned enterprises; * privately owned enterprises; *** as of October 2013 Source: Mergermarket; L.E.K. research & analysis 18 The two government-backed deals were through aviation businesses acquiring Thielert and Fischer Advanced Composite Components CONFIDENTIAL
  20. 20. Co-investments and exits Kion Group has attracted the largest direct Chinese company investment in Germany to date  In August 2012, Weichai Power, a unit of China’s Shandong Heavy Industry Group, completed a €738m investment in Kion, the German forklift truck maker - €467m to acquire a 25% stake in Kion directly, and a further €271m for a 70% stake in a Kion hydraulics subsidiary  The deal was touted as a way for Kion to build more access to the Chinese market, c.25% of global demand for forklifts  In June 2013, Weichai Power acquired another 5% ahead of the IPO at the end of June 2013 - Financial and stock performance has steadily improved primarily driven by demand from emerging countries Deal summary Target Kion Group GmbH Bidder Weichai Power Deal terms €738m (25% stake) Deal rationale ● Kion plans to grow in Asia through partnership with Weichai ● Weichai gets access to Kion’s expertise in high-end industrial trucks Source: Financial Times; Mergermarket; company websites CONFIDENTIAL 19
  21. 21. Co-investments and exits In terms of exits to Chinese investors, Putzmeister has been the most sizeable transaction to date  In January 2012, Putzmeister, a global manufacturer of construction machinery based in Germany, was acquired by Sany Heavy Industry, a China-based conglomerate  Sany Heavy Industry is owned by CITIC, a prominent Chinese fund The merger created one of the world’s largest construction manufacturing companies “… The deal could herald a new era of Chinese deal making in Europe as Chinese companies look to “go global” and reduce their exposure to their domestic economy …” Financial Times, Jan 2012 Deal summary Target Putzmeister Bidder Sany Heavy Industry Deal terms c.€324m (90% stake) Deal rationale ● Sany resolves Putzmeister’s succession issues and provides strong financial capital ● Sany leverages the Putzmeister brand and engineering prowess as it seeks to create a global Chinese construction equipment brand Chairman of Sany Heavy Industry Liang Wengen and Putzmeister CEO Norbert Scheuch Source: Bloomberg; Financial Times; Mergermarket; company websites CONFIDENTIAL 20
  22. 22. Co-investments and exits Despite often high strategic premium price offers and compelling strategic logic of a deal, there are often material obstacles that need to be overcome Challenges Mitigating Factors  Intermediation and mutual education / communication  Clearer communication of key investment hypotheses and involvement of target management / shareholder in evaluation thereof Rationale for China strategic premium not obvious leading to distrust from sellers as to how real the bids are  Expectations management on both sides  Early review and communication of potential issues  Deal approval risk   Political risk In the short-term, focus on strategic cooperation with little operational overlap; medium- to long-term operational collaboration in areas where it makes sense  Doubts regarding access of bidder to finance and confirmation of financing terms  Concern about capability of bidder to manage global operations and retain core assets (Minority shareholders, Management, staff, Brand)  China corporates and investors still primarily focused on China and pan-Asia  lower levels of comfort and confidence in European deal environment CONFIDENTIAL 21
  23. 23. Summary observations  China investors, both corporate and financial, will increasingly be looking at investment opportunities beyond the domestic markets  Of particular interest for Chinese investors are companies that - Are related to China focus industries Bring a European brand to the Chinese consumer Help develop Chinese corporates in their globalisation by bringing valuable technology and / or brand to the table  Of particular interest for Western / German investors are - Flexible strategic equity investment (minority / co-investment as well as lead investments) in companies which are less interesting for European PE or strategies - China market access Strategic partnership to defend and build global market position  There are material challenges as with many cross-border deals, however these are often really dealdependent and over time they are on average likely to become less of an issue Keep Chinese investors on the radar for both co-investment and exit strategies CONFIDENTIAL 22