According to the Global M&A Annual Report 2016 jointly released by PwC and the China Association of Private Equity, in the first half of 2016, the value of overseas M&A transactions by Chinese enterprises increased by nearly 3 fold to reach 134 billion USD, surpassing the total of the previous two years combined. However, there are specific rules and risks in overseas M&A.
As a sub-forum of 2016 the Phoenix International Forum whose theme was Dialogue with the World, this investment workshop cast its eyes upon the overseas investment boom among Chinese enterprises, aiming to discuss the global vision and China’s potential behind its overseas capital layout, explore the best way for Chinese capital to gain its position in the overseas market and offer intellectual support for the long-term development of Chinese enterprises in the international market.
Currently the most important issue for overseas investment is risk. There is still room for improvement in terms of our ability to handle an international investment environment and to deal with multinational corporations. Now a lot of enterprises would readily jump on any overseas investment opportunity without due diligence. Investment projects can be highly varied and complex and cannot be dealt with in such a manner. Therefore, the question of how enterprises can select areas of investment that suitable for them is critical and it requires discretion and a global vision.
As a result, the enterprises need to learn about and grasp the global market as well as the changes that are taking place within the market. In addition, the Wall Street has an uncanny ability to influence the market, so you can only see clearly by watching the Wall Street, the financial markets and the investment risks closely.
In addition, attention needs to be paid to internal risks, in which the biggest one is the personnel. Internal integration and the effective allocation of human resources is the first step for modern enterprises, but it is by no means an easy step, so companies still have a lot to learn. China is bound to play an important role in international investment rules, so the country repeatedly voiced its intention to actively participate in global governance at the G20 summit. However, global governance is an intricate process that requires consultations among major powers, and China represents the interests of developing countries. There is the question of how China can effectively conduct the consultations with other major powers in order to reach a basic consensus on global governance. In my opinion, China will likely start drawing on the blank spots first to materialize its role and influence.
We are well aware that participation in global governance is not to destroy it all or go back to the drawing board again. Global governance is definitely not about who is to dominate an issue at some point in time, but involves effective performance, the building of a foundation and accumulation of influence at each and every turn. Our influence and leadership reside in the recognition and trust from other countries around the globe.
China is striving towards building a new open-up economy, with one of the key objectives, that is to cultivate the new edge for enterprises to compete effectively in global competitions. Now we are in the process of learning the ropes, so enterprises need to continually improve themselves in order to adapt to changes in the global market and become better at handling a complex international investment environment.
The topic of opportunities and challenges associated with China’s investment in the US is an exciting one. I firmly believe that China's investment in the US can bring great rewards to the investors, and vice versa, US investment in China is also mutually beneficial.
Chinese investors need to examine the six main aspects to ensure the success of their investments in the US- -
First, the investors need to understand the national security situation in the US; second, the investors need to learn about laws and regulations in the US; third, the investors need to improve transparency and comply with the law; fourth, the investors need to understand how the amount of other overseas investment might affect their investment in the US; fifth, the investors need to build a relationship with local governments and communities; sixth, the investors need to develop mechanisms for managing investment.
The current risk at the front and center is that, under the increasing pressure, trade protectionism has been growing in many parts of the world. For instance, both of our presidential candidates have spoken of a 40% increase in export tariffs to address the American people's concerns about economic growth, trade and employment. However, from a long-term perspective, bilateral trade and investment serve the interests of the people of both nations and they remain an integral part of our bilateral trade agreements.
What kind of assistance can we provide as a private equity firm for Chinese companies' overseas M&A endeavors?
Companies that participate in the real economy focus the majority of their capabilities and resources on such fields as R&D, manufacturing and sales. Although they may have a strategic interest in premium overseas assets, yet a lack of relevant experience in M&A operations presents obstacles. They can solicit the help of third-party agencies, but more often than not, these agencies fail to grasp the core needs of the enterprises. This is where private equity capital can come in to provide help.
Firstly, funds assume a more neutral position than strategic investors and thereby avoiding the image of a hostile take-over to a certain extent. We have learned from previous experiences that our identity in the overseas investment as a M&A fund with a financial background precludes any technical conflict with the target company or its parent company, and in turn renders the acquisition process more readily accepted.
Secondly, the approval process is relatively simple. For large-scale M&A deals, approval remains a key factor of uncertainty and directly affects the completion of the deals. In particular, the participation by SOEs involves a greater number of approval authorities and longer processing time. In this regard, the fund has some certain advantages. If listed companies participate in the establishment of the fund and subscribe to a certain proportion of the shares, then oftentimes only pre-disclosure and announcement through a relevant bourse are required.
In this respect, China Jianyin Investment has handled a number of overseas M&A and investment deals and established a sound reputation and relationship with approval authorities especially in the US and Europe. We have won the approval of mainstream European and American authorities for large projects both in the high-tech and manufacturing industries. This is the result of the synergy of advantages from finance and industry.
Thirdly, private equity funds possess the strength and resources required for M&A operations and consolidation and they can provide a full range of effective financing and management services for the acquirer. In the process of "going global", industries will undoubtedly need the support of financial capital in order to grow and expand; and capital also needs to lock arms with industries in order to expand and realize its full potential.
While overseas M&A by Chinese enterprises is already growing at a fast pace, with the size as the second largest world’s economy in mind, there is still a huge room for China’s further growth. Experienced in investment operations both at home and abroad and standing at a high industrial perspective and vision, China Jianyin Investment possesses ambition, strong financial background and operational experience in the real economy to be able to join hands with Chinese industries to make a contribution together by leveraging its know-how, resources and value to the transformative development of China’s real economy through its international investment and M&A endeavors.
(Former Director of Chinese Academy of International Trade and Economic Cooperation, Ministry of Commerce)
(Former Assistant U.S. Trade Representative to China)
(Chief Investment Officer of JIC Technology Investment & Chairman of JIC Capital Management)