KKR’s China Dealmaker Warns Against Focus On Control

Private equity groups investing in China must give up on the idea of taking control of target companies, which often are run by entrepreneurs with an emotional stake in their businesses, influential dealmaker David Liu said on Oct. 12.

“Frankly, those strategies don’t apply in China,” Liu, head of Greater China for Kohlberg Kravis Roberts & Co., said at a forum.

“Most in China now are first-time entrepreneurs. They view their business as their baby. If their baby is healthy, there is long term potential, they don’t want to sell.

“For a market like China, most of the good business today is not for a change in control sale,” he told an audience at the AVCJ Private Equity & Venture Capital Forum.

Beijing, which has historically viewed private equity firms as speculators, is becoming more welcoming of foreign funds to invest in China, thereby creating more local jobs.

But foreign investors have complained it remains difficult to win government approval for control of market leaders, so buyout deals are rare in the Communist nation.

In 2008, U.S. buyout giant The Carlyle Group eventually walked away from three years of negotiations to buy Xugong, China’s top construction equipment maker, after running into bureaucratic obstacles.

“In most other markets, most people know what others are doing on the deal side. Deal flow is transparent. Most of the deal is facilitated by investment bankers. It is almost like buying artwork in Christie’s or Sotheby’s,” said Liu.

“When you do deals in China it is like [buying] antiques. It is greater risk, tougher to find, you may get cheated easily,” he added. “But if you know how to work in this market, you will always find deals that are attractive.”

“In China, the market is not transparent. That is the challenge. That is [also] the opportunity,” said Liu, who joined KKR in 2006 from Morgan Stanley where, as its co-head of Asia private equity business, he led landmark deals including buying a stake in China’s number-two life insurer Ping An.

The U.S. private equity firm, known for mega-sized leveraged buyouts in the West, has been actively making deals in China in recent months as Asian markets led by China are recovering rapidly from the global financial crisis.

In October, an investor consortium led by KKR poured a combined $160 million into a Chinese financial leasing firm for an about 30 percent stake in the firm.

In June, KKR said it bought a non-controlling stake in Ma Anshan Modern Farming Co Ltd, a leading dairy farm company headquartered in central China.

KKR is interested in consumer-related sectors, said Liu, adding about 300 million Chinese are likely to move from villages to cities in the next 15 years, boosting domestic consumptions.

“If you look at the macro-standpoint, the urbanization trend and rising middle class, that is going to drive the demand significantly,” he said.

(By George Chen and Narayanan Somasundaram)