Private equity buys in China get tougher

By Alison Tudor, Asia Private Equity Correspondent

HONG KONG (Reuters) - Private equity firms are queuing up to invest in fast-growing Chinese companies, but Beijing wants to limit access to partners it thinks can build world-beaters and help develop its capital markets.

In response, private equity firms are falling over each other to prove that they can help Chinese companies grow and improve corporate governance. Some are also foregoing their preferred options of majority control and structuring deals offshore.

"The government has to want you as an investor. You can't horn your way and expect to come in and wave around a fist full of dollars and expect to walk off with something," Ralph Parks, chairman of Oaktree Capital (Hong Kong) Ltd., told the Reuters Hedge Fund and Private Equity Summit in Hong Kong.

Some investments by private equity firms have run aground in China because of Beijing's perception that funds make short-term investments in Chinese firms, while trade buyers offer more in terms of long-term technology-sharing and operational experience.

Private equity is fighting its case, but picking its battles.

"If they want a Volvo, a Caterpillar, a Ford -- it's not you, mate," said Parks, stressing that Oaktree's investments are long-term in nature and leverage the experience of its portfolio companies spanning the globe.

Other private equity buyers also play up their ability to raise shareholder value and argue that trade buyers are using local players as a springboard to bring their own business into China's expanding market.

CARLYLE CURBED

Washington-based private equity firm Carlyle Group CYL.UL scaled back its original bid for majority control of leading Chinese machinery maker Xugong to a minority stake in order to win Beijing's blessing.

Approval of Carlyle's deal for 8 percent of Chongqing City Commercial Bank is also taking its time. Sources familiar with the matter said the delay was due to the fact that the process was easier for a trade buyer, such as Hong Kong's Dah Sing Banking (2356.HK: Quote, Profile, Research, Stock Buzz), which has already had its purchase of a 17 percent stake in Chongqing approved.

New investments in China by private equity funds slipped 4 percent in 2006 to $8.6 billion, according to the Asian Venture Capital Journal.

Baring Private Equity Asia Group, which has made the bulk of its investments in China, is diversifying its portfolio into countries including Japan and India, partly because of the risks posed by China's constantly shifting regulatory framework for private equity investing.

LABYRINTH

Beyond headline-grabbing buyout deals such as Xugong, smaller growth-capital investments are also changing to appease Beijing.

To invest in a Chinese firm, a private equity firm would typically transfer ownership offshore, making it easier to eventually sell via a listing on international stock exchanges.  Continued...