One of the prevalent themes of the Chinese market in 2015 was the increased competition private equity (PE) firms experienced in mergers and acquisitions in the Greater China region. With corporates bidding aggressively for target companies, we saw valuations pushed to lofty levels. Under pressure to continue to grow revenue and market share, industry leaders such as Alibaba, Baidu and Tencent, to name a few, were especially active in 2015.
Strategic acquirers have not only been competing for the same targets but also making dominant or controlling late-stage investments in many PE-backed portfolio companies in several cases. This tends to create tension and uncertainty for potential exits because private equity firms and strategic acquirers may have different investment horizons and agendas. However, if the initial public offering market remains volatile in 2016, the pressure for portfolio companies to consolidate and seek M&A opportunities will only increase.
With a lot of dry powder, deal appetite will remain strong among PE firms but finding opportunities to deploy their capital will continue to present a challenge in 2016.Corporates will continue their M&A growth strategies and drive up valuations.
In this heated environment, we are likely to see disciplined PE firms stay active by expanding their sector focus and pursuing bolt-on acquisitions to existing portfolio investments.
Simultaneously, another rising trend has been that of domestic private equity fueling the resurgence of Chinese companies announcing plans to delist from the U.S. in 2015, with the majority seeking to relist in China.
Volatility in the Chinese stock market put many of those privatization bids in doubt but the market has stabilized in the past three months and a number of previously announced transactions have reached agreement and received the green light from shareholders.
Sohu’s announcement at the end of 2015 arguably set the tone for what could be a very active period for “going private” transactions in the new year.
Looking ahead, we expect this trend to continue and even surpass the number of “going private” transactions in 2015, which reached 34 deals at year end.
The TMT (technology, media and telecom), healthcare, and alternative energy sectors are once again likely to lead the way in this respect.
One of the notable aspects of the resurgence of the U.S.-listed, China-bound private transactions has been the domestic nature of the acquiring parties, including various domestic strategic and financial parties. This contrasts with what was formerly a transaction type led by international private equity sponsors. We also expect this trend to continue.
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(This piece was first published in EJ Insight, the English service of the Hong Kong Economic Journal (Hong Kong’s first Chinese financial newspaper), on December 29, 2015)