Chinese entrepreneurs selling out to private equity firms

HONG KONG • After spending half his lifetime building the family snack food company in the eastern Chinese city of Hangzhou, Mr Yao Weizhong had run out of steam. His 22-year-old son showed little interest in the business, and Mr Yao needed fresh capital and expertise to keep it growing.

So Mr Yao, 48, chose a path taken by a growing number of Chinese entrepreneurs these days: He sold a controlling stake in his company, Yaotaitai, to a private equity firm.

"The company is hitting a bottleneck," Mr Yao, who sold the stake in December to Shanghai-based Lunar Capital, said last week. "I don't have enough energy at this age, and my kid is reluctant to take over. I can't force him to like it."

From the financial hub of Shanghai to northern coal-rich Shanxi province, Chinese entrepreneurs facing the twin challenges of succession and a slowing economy are becoming more willing to cede majority ownership to buyout firms.

It is a tectonic shift in a market where the likes of the Carlyle Group and KKR have traditionally been forced to forgo controlling stakes in order to enjoy the spoils of China's breakneck growth since the country opened up to private equity firms in 1994.

Buying control allows buyout firms to apply the model they have honed over decades in developed markets: Acquire undervalued companies and turn them around by cutting costs, replacing management and overhauling their strategies - unencumbered by resistance from entrenched founders.

"It's indisputable that the control approach in China works better and returns more," said Mr Derek Sulger, a partner at Lunar Capital. He said it is still hard to find large deals, especially in hot sectors such as technology and education, so private equity firms are focusing on smaller companies in the consumer and retail industries.

Deals involving a change of control accounted for 34 per cent of the total value of private equity transactions in China last year, more than double the share in 2014, according to the Asian Venture Capital Journal.

Excluding so-called arbitrage deals, which typically involve delisting companies and taking them public in markets where multiples are higher, "control" deals jumped to a record US$6.8 billion (S$9.3 billion) last year from US$4.9 billion in 2014, the private equity research firm estimates.

Mr Sulger said he is holding buyout talks with at least 10 Chinese companies whose founders or managers are looking to retire and sell controlling stakes. In many cases, it is purely economic factors that are pushing China's entrepreneurs to sell out.

Many small business owners have never had to deal with the need to cut costs or implement sweeping changes, said Mr Weiwen Han, co-head of Bain & Co's private equity practice for Greater China. "It's about cost reduction, operational efficiency, changing the business model and transforming themselves. They've never done it."

Conversely, many buyout firms have not developed the skills required to take over and overhaul Chinese companies, compared with the more passive role they are used to playing.

For some of China's entrepreneurs, the primary motivation for selling out is their own quest for a quieter life. Mr Sulger said he is talking to two companies whose owners want to retire and focus on spiritual pursuits.

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A version of this article appeared in the print edition of The Straits Times on April 15, 2016, with the headline 'Chinese entrepreneurs selling out to private equity firms'. Print Edition | Subscribe