Chinese outbound investment is at an all-time high and sustained high growth is expected over the coming years. 

24-01-17

At the end of last year I spoke to Bloomberg Radio + on Chinese outbound investment.

You can listen to the full interview here

Advisian has worked with numerous Chinese companies on their acquisitions, especially in the resources, energy and infrastructure sectors. In the last five years we have seen some clear trends emerge.

Three classes of investors

There are now three clear categories of Chinese outbound investors. The first are the resources investors, a group that has been active the longest and is the most visible. Chinese resource companies have not changed their ambitions much – it is still all about securing the resources, be it coal, iron ore or steel. Uranium is now on their list as China seeks to secure its long-term nuclear needs.

The second group of companies are pursuing strategic plays. These are often in power generation and distribution as well as transport. Agriculture and renewable energy are two other priority areas where the Chinese have strategic reasons for encouraging acquisitions. 

A third and emerging class of outbound investor are the financial institutions. Chinese banks and insurance companies are seeking to gain access to infrastructure, skills, or international reach.

Sophisticated due diligence 

The first group of investors – the “resource investors” – have not fundamentally changed their levels of sophistication when it comes to outbound investments.  For them the priority continues to be gaining access to strategic resources, often at all costs, and with little investment in due diligence (e.g. environmental, commercial, resource life etc.).  

Based on our observations and projects Advisian has been involved in, the second and third groups of investors, however, have become significantly more sophisticated in their approach and preparedness.  

Five years ago many Chinese companies did not have the in-house teams to do due diligence. And they were not prepared to spend on external advisors to do it for them. 

That has all changed. We are now seeing a sophisticated and more granular approach to due diligence by Chinese buyers. 

Take a recent example of a Chinese firm buying a large Australian construction company. The Chinese buyer spent months looking at each individual contract, trying to understand the forecasted profitability, looking for liabilities and working out if the acquisition was going to be accretive in the long-run.

It’s a similar story for another Advisian project in Brazil. Here the Chinese buyer enlisted a large local team to work on the deal. And the team was hired as employees, not as external advisors. 

These are trends that we expect to continue, particularly as acquisitions become more consolidated among larger and more sophisticated players (an effect and implication of the recent restrictions on cross-border M&A activity that the Chinese government announced).

To attract Chinese investors, companies will need to go granular on their own value

The days of lazy deals are over. Chinese companies are no longer interested in pursuing the deal for the deal’s sake. The new focus on proper and thorough vetting of an acquisition target reflects the increased attention these deals are getting, both internally as well as back in China.