December 9, 2016
What to know about inbound Chinese deals
Here’s a question we’ve been getting asked a lot lately: “Will China’s appetite for buying up US assets subside during this period of transition between presidential administrations?” Sure, there may be some hesitation in the near-term until there’s more clarity on the new administration’s international trade policies, but we believe there are several reasons for the US to continue to be viewed as an attractive market for Chinese investors.
Contrary to conflicting reports in the news, China’s interest in the US is likely to continue. Whether or not the deals get done – and when – is another story, but when we visited the country earlier this month, we heard resounding feedback about the attractiveness of the US market from business leaders across all sectors – including a mix of state-owned enterprises, private companies and financial buyers.
Several executives from across industries and sectors echoed and reinforced the same sentiments over and over again. We heard many of the same points raised in multiple meetings so it was hard not to notice a pattern emerging. Here are a few takeaways from what we heard in our meetings:
- The US is an “island of sanity:” Politics aside, the perception of our economy is that the US remains in a position of strength relative to the ongoing volatility we’re seeing in Europe and across the rest of the world. The US has continued to demonstrate economic resiliency and stability over a very long period of time – and regardless of who is president. Their perspective is that the US is a “safe haven” in the world of capital investments. Also, the strength of the US dollar generally provides much more stable form of currency for investments. One PE executive was steadfast in his stance that if he wanted to invest in technology today – the only place he would invest in tech would be in the US.
- Business endeavors transcend politics: Certainly the biggest potential barrier to Chinese inbound deals in the foreseeable future hangs in the balance of what changes actually get implemented under President-elect Trump’s administration. Chinese business leaders we met with acknowledged the need for a better understanding surrounding proposed trade agreements under the new administration, but what resonated was the idea that business rationale trumps the political environment in so many ways. For example, as a result of the standstill surrounding Brexit uncertainty, there remains a significant amount of capital available and funds that need to be deployed for investment. We don’t expect reports about the Chinese government’s concerns over capital flight to impact these trends.
- Desire to operate in the US: We’ve seen ebbs and flows in Chinese-inbound deals over the years, but this wave feels different. Dealmakers we spoke with discussed a specific desire to not only invest in the US but also to run and operate a business in the US This is departure from past Chinese deals which were designed to buy and leverage US capabilities or intellectual property to bring back into the China market. In this sense, it’s different because it signals that China doesn’t need the US market to be successful – but the focus here instead is a desire to own and operate businesses resident in the US market – and they’re willing to pay a premium for it. We’re seeing interest across the board in terms of industries, including in healthcare, TMT, hospitality, retail and consumer products.
- Cultural clash and integration concerns: The biggest concern from Chinese investors is the ability to seamlessly integrate post-deal. We fielded several questions about the US workforce, multigenerational demographics (e.g. millennials) and general differences between the US working environment compared to the Chinese way of doing business. One group we spoke with said if they bought a company here in the US, they would want to make sure the management team had a willingness to understand the Chinese culture so they could build trust and in turn, a long-term, successful business relationship.
There is a Chinese proverb that roughly translates to “only a fool tests the water with both feet.” In this sense, Chinese investors are merely “dipping a toe” in the US market right now. They’re willing to court fairly large transactions, but at the same time, they are looking for the lowest possible risk equation. We don’t expect to see too many Chinese buyers engaging in turnarounds or complex transactions with a higher risk of failure or deals heavily contingent on US regulatory approvals. But because this wave of Chinese inbound deals looks different from ones we’ve seen in the past, we’re finding there is a new awareness that buyers and sellers don’t know a whole lot about each other or how they operate, which will ultimately require more effort around building trust and transparency throughout the deal process.