BDA China Growth Capital Conference 2022
BDA Partners hosted our inaugural China Growth Capital Conference on April 26th – 28th. 20 presenting companies from consumer, health, services and technology sectors gave presentations to growth capital investors in over 200 virtual one-on-one meetings.
Anthony Siu, Partner and Co-Head of Shanghai, said: “Our 3-day virtual conference was a big success. It was BDA’s first growth capital conference and it attracted over 300 investors from 150 PE firms to participate in our conference. The attendees included blue-chip global and China USD funds as well as China RMB funds. We also received strong support from Founders and CEOs of high-growth companies in China to present at our conference. These companies represent industries which are at the forefront of China’s economic development including digital health, in-vitro diagnostics, premium healthcare services, lifestyle & wellness and fintech. The strong turnout reflects investor appetite for high-quality companies set to benefit from China’s rapid transformation toward an advanced economy. It also demonstrates ample private market liquidity seeking mid to late stage opportunities in China. We are very pleased to be the partner of choice for our clients in bringing private capital and exciting growth opportunities together.”
We look forward to our next BDA China Growth Capital Conference in 2023, and also the annual BDA PE Conference in late 2022. Please contact us at email@example.com or firstname.lastname@example.org if you would like to learn more about either conference, and the benefits of both presenting and attending.
Since 2020 BDA has successfully advised on nearly 60 transactions, making us one of the most active M&A advisors in Asia. This level of experience underpins our ability to deliver successful outcomes for our clients under dynamic market conditions.
For over 20 years, our Hong Kong team has advised multinationals on strategic carve-outs and bolt-ons, guided entrepreneurs on divestments and capital raises, and supported financial sponsors on investments and portfolio company exits.
We continue to leverage this experience and insight to deliver value-optimising results for our clients who entrust us with their business.
The enclosed flyer provides a snapshot of our capabilities and our recent track record globally and in the Greater China region. Our experienced and dedicated team of Hong Kong-based bankers is ready to support your M&A ambitions. Should you wish to learn more about BDA, our expertise and how we can assist you, please reach out to one of our contacts below:
- Paul DiGiacomo, Managing Partner: email@example.com
- Simon Kavanagh, Partner: firstname.lastname@example.org
- Karen Cheung, Managing Director: email@example.com
- Mireille Chan, Director: firstname.lastname@example.org
- Jakub Widzyk, Director: email@example.com
A Q&A with Anthony Siu, Partner, Co-Head of Shanghai and Head of China Financial Sponsor Coverage, at BDA Partners, on the outlook for China M&A, private equity exits and outbound M&A activities
- 2020 was a record year for domestic Chinese M&A. Do you see this continuing in 2021?
Yes, I do see that trend of domestic Chinese M&A continuing, and even accelerating in 2021 and beyond. 2021 year-to-date domestic M&A has been on a record pace, with $80bn of deals announced and the busiest ever start to a year. This period saw three times the level of M&A deal value of the same period in 2020.
Covid-19 impacted the China M&A market heavily in the first half of 2020 but, since then, the market has rebounded significantly. Chinese buyers are focusing their M&A efforts domestically, largely due to geopolitical tensions, travel restrictions, and the severe impact of Covid-19 in Europe and the USA, along with shifting focus to domestic demand.
We see more domestic players speeding up their plan to expand in China. They are using this opportunity to consolidate in the domestic market, to accelerate growth, and to expand beyond their own regions to the whole country. Some national champions are emerging in certain sectors. With China aiming for more self-reliance and the economy still growing, I expect there will be further domestic M&A consolidation.
In terms of sectors, consumer and healthcare are the favorites for domestic buyers. As China is gearing towards consumer upgrade with higher disposable income, the consumer market will continue to grow. The large corporates would like to accelerate their channel network and market share expansion through acquisitions.
Healthcare is another area where we expect more domestic activities. The strategic players are looking at ways to expand their market share in a fast-growing but fragmented market. For example, in the healthcare services areas, we see a lot of M&A activities in hospitals, specialist clinics and rehabilitation centers.
- Do you think we will see Chinese family owner / founder business preferring IPO or trade sale exits in 2021?
I see both happening. The IPO market has been hot over the past year. The STAR Market has enabled smaller, high growth companies to list at attractive valuations. For founders who have no plans to retire or exit soon, or have high growth businesses that are tough to sell at an early stage, they will prefer the IPO route.
But for founders who have established businesses in traditional industries such as industrials and consumer & retail, trade sale can be a very attractive exit route for them. Strategic and private equity buyers are interested in market leaders with strong cash flows, and targets with these characteristics can attract strong interest.
- How do you see Covid-19 impacting PE owners’ timing and planning for exiting their investments?
Last year we saw PE sellers postponing their portfolio company exits due to adverse business environment. Looking ahead, we should see more PEs exiting their investments to clear the backlog. In the first half of this year, some PE firms are waiting to establish a clear path of recovery of the target’s financial and operating performance, and we expect trade sale exits to accelerate in the second half of the year.
- Do you see distressed / restructuring M&A opportunities in 2021? Domestic or overseas Chinese owned assets?
Not so much in China because the Covid-19 impact was short-lived. The over-leveraged situations for some enterprises happened before Covid-19 and they were forced to de-leverage. We saw a lot of these divestiture activities in the past 1-2 years.
Outside China, there may be more distressed and restructuring opportunities for companies that are looking for liquidity. With Chinese buyers being more active in outbound investments, we may see more deals done in overseas asset restructurings.
- China outbound M&A in 2020 was the lowest in the last decade. Do you see it bouncing back in 2021? If so, what sectors and countries will be attractive?
Since the beginning of this year, we have already seen early signs of recovery in outbound M&A. The Chinese players are becoming more active in outbound transactions into Europe and the rest of Asia such as Singapore and fast-growing countries like Vietnam; less so into the US because of the tensions between Washington and Beijing creating significant deal uncertainties. As the pandemic situation eases and borders re-open, we should see outbound deal volume picking up through the rest of the year.
I believe outbound investors will continue to favor sectors such as industrial and healthcare. Another sector that has benefited from the pandemic was transportation and logistics due to the boom of e-commerce.
- How do you see the geo-political relationship between China and the USA playing out under the new Biden Administration?
We have probably hit the lowest point of the China-USA relationship during the Trump Administration. I think the Biden Administration will take a firm but pragmatic approach to China, knowing that this is one of the most important strategic relationships to the US. US companies have significant investments in China, and they need to be protected. China is the biggest market in the world in many respects, and the US cannot afford to ignore that opportunity.
On the other hand, China will continue to open up. The government has already removed a lot of restrictions in foreign direct investments. Going forward, I expect that there will be a revival of US interest in investing in China.
- Will the new EU-China Agreement boost cross-border M&A in 2021?
The EU-China agreement primarily focuses on the China market opening up to the EU. It helps various sectors, for example, new energy, healthcare services, financial services; areas that were traditionally protected by the government. The EU companies will benefit from this agreement by China opening up these sectors more for EU investments. In terms of M&A, we expect to see more EU companies increasing their investments in China, through outright acquisitions or strategic investments. However, the recent sanctions row between the EU and China put the ratification of the agreement in doubt. I believe both sides will lose if the agreement falls through, and hope that they will find a way to avoid escalation and put the agreement back on the right path.
1. Pandemic? What Pandemic?
China’s Communist Party will mark its 100th birthday in July 2021 with typical pomp and ceremony. Celebrations will be cheered by an economy which shrugged off the effects of the Covid-19 pandemic remarkably quickly.
China recorded a sharp slowdown in Q1 2020, as the first country to be hit by Covid. China’s GDP dropped more in those three months than during the 2009 global financial crisis.
Beijing took the unprecedented step of locking down Wuhan a year ago, on 23rd January 2020. Economic activity and travel across the country ground to a virtual halt in the following months until the virus was stamped out. The Government tested repeatedly and widely for Covid, and on a scale other countries can only dream of: For example, in Qingdao, 12 cases in October 2020 resulted in nine million residents being tested in just five days. Unlike Western countries like the US, which focused stimulus efforts on lowering borrowing rates and handing out money to consumers, Beijing focused on restarting factories while keeping interest rates relatively high.
China’s factories came back online from April 2020, as the world’s manufacturing capacity was sputtering to a halt in the face of the devastating pandemic. China actually benefitted from the global slowdown, producing and exporting huge quantities of medical equipment, face masks and work-from-home electronics, such as laptops and monitors.
The Chinese economy roared back to life in Q2: year-on-year GDP went up by 3.2%.
China avoided consecutive quarters of negative growth, escaping the technical definition of recession. China was the only major country recording positive growth in Q2 2020.
China GDP continued to grow in Q3 2020, with year-on-year growth of 4.9%.
The pace has since accelerated. The Chinese economy grew 6.5% in Q4 2020, compared to a year ago. This was notably higher than pre-pandemic growth rates.
Chart 1 – China actual quarterly GDP growth % 2019 to 2020
2. Thirty five years of growth
China’s economic miracle has lasted more than three decades. After recording 10% growth in 1987-88, China slowed in 1989-90, following violent repression of the pro-democracy protests in Tiananmen Square, Beijing, in June 1989. That led to a stark interruption of steady liberalization of the Chinese economy.
High growth rates returned quickly by 1991, and ran unabated until 2019. GDP grew by more than 9% per annum over those thirty years.
Of course, there have been significant hiccoughs along the way. The Chinese economy was already slowing dramatically before the outbreak of Covid, recording GDP growth of only 6% in 2019.
Going into 2020, The World Bank forecast 1%-2% growth for China; the IMF forecast 2%.
China’s eventual 2.3% growth in 2020 bucked the global trend. Other nations are still weighed down in the throes of the pandemic. All major global players except China, will record negative annual growth in 2020, according to IMF and the World Bank. And yet, the pandemic is apparently receding in the rearview mirror for China.
The World Bank estimates the US economy shrank by 3.6% in 2020, Japan shrank by 5.3%, and the Euro area shrank by a depressing 7.4%.
Chinese GDP per capita now exceeds US$10,000 for the first time in history, with almost no population growth at all.
Chart 2 – China actual GDP growth % 1985 to 2020 and forecast to 2025
3. An aggressive President Xi
President Xi Jinping this week restated the importance of economic growth, highlighting “balance” in the Chinese economy, with strength in agriculture, more investment in infrastructure, and innovation in the tech sector.
President Xi reported reliable harvests and grain production for 17 years in a row, as well as breakthroughs in scientific explorations including the Tianwen-1 (Mars mission), Chang’e-5 (lunar probe), and Fendouzhe (manned deep-sea submersible). Development of the entire Hainan island, which is comparable in size to Taiwan, into the Hainan Free Trade Port, is proceeding at pace.
2021 will also mark the start of China’s 14th five-year plan, a closely watched road map covering 2021–25.
The World Bank is optimistic about China, predicting 2021 GDP growth of 7.9%, almost double the global growth projection of 4%.
Of course, outside observers are sceptical about the accuracy China’s reported figures, which are presented as part of President Xi’s nakedly political PR efforts. Nonetheless, BDA sees clear evidence of confidence and momentum, as Chinese private equity and IPO markets remain positive. It will be harder to achieve double digit growth, given the bigger base today, but there’s every reason to see that China will keep growing well.
Ignoring wide criticism of China’s maritime expansion, iron fisted rule over Hong Kong, and repression over the Uighurs in the northwest, Xi Jinping is asserting himself as aggressively as ever: “China will keep striving, marching ahead with courage, to create brighter glory”, he stated in his New Year’s address.
China’s ability to expand, even as the world fights to control Covid that has killed two million people, underscores the country’s success in taming Covid within its borders, and cements its unchallenged role as the dominant economy in Asia.
For now, the economic data reveal an economy still driven primarily by industrial production and investment rather than consumption. And yet, China consumer confidence is also recovering well.
4. China is unique
China’s growth makes it an outlier even among the greatest global economies. The World Bank expects the US economy to have contracted by 3.6% in 2020, and the Eurozone’s to have shrunk by 7.4%, reflected in global economic contraction of 4.3%.
This good momentum means that further recovery in China will likely have to take place without significant stimulus from the Government.
Provincial and local governments in China have some US$300bn in unspent stimulus money left over from 2020.
The export bonanza saw China ship 224 billion masks around the world from March to December 2020: 40 masks for every man, woman and child on the planet outside of China.
Domestic consumer demand may be sluggish in 2021, as wage growth is not yet back to pre-pandemic levels. That may explain Xi’s efforts to sound bullish, but the CCP under Xi tends to avoid sharp turns in policy.
China’s increasingly tense relationship with the US has caused China to pivot towards the EU, which was supported by both sides reaching an agreement on the EU-China Comprehensive Agreement on Investment in late 2020. Contrast this to the US, where in his final weeks in office, President Trump tightened restrictions on Chinese companies, to curb China’s tech sector dominance. This tension is worrying to financial markets. Wall Street is watching to see whether the incoming administration under President Biden will soften this stance at all.
Meanwhile, life continues relatively undimmed across China. People are going to restaurants again, particularly in affluent cities like Shanghai and Beijing. Service businesses like hotels and restaurants are performing well in the big coastal cities, but have not yet recovered in the inland provinces.
After its staggering success in taming the coronavirus, China has suffered renewed smaller outbreaks in the last month or so. The government mobilized quickly, building hospitals, imposing mass testing and putting 30 million people back under lockdown. The intrusive health checks will discourage consumers in the northeast from spending. Chinese families remain wary of big-ticket expenditures, new cars, or extensive home remodeling.
Retail sales growth stuttered in December, slowing to 4.6% from 5.0% the month before. The “Made in China” label has gained popularity, as people stuck in their homes cautiously redirect their spending. The consumer electronics sector has been especially resilient.
Beijing has ramped up its infrastructure spending. Every major city in China is now connected with high-speed rail, enough to span the continental US seven times. New lines were rapidly added last year to smaller cities. New expressways crisscrossed remote Western provinces. Construction companies turned on floodlights at many sites so that work could continue around the clock.
Despite reports to the contrary, China remains the workshop of the world. China’s exports grew 18.1% in December compared with the same month a year earlier, and 21.1% in November.
IPOs are booming as entrepreneurial companies go public at breakneck pace, across China. At BDA, we see M&A markets which are robust, and booming.
This explains why private equity and institutional investors are betting that China, which seemed like it might fall out of fashion in 2020, will continue to shine, and outperform the rest of the world.
Miraculously, China is approaching the Lunar New Year in rude health. 2021 will be the Year of the Ox, a fitting image for the Chinese economy.
Euan Rellie, Co-Founder and Senior Managing Director of BDA, in New York, recently joined a webinar International Business Briefing: What is the Future of the China Market, hosted by the US-China Business Council and Faegre Drinker.
Euan shared insights on M&A trends in China and Asia:
- China M&A Overview
- In 2019, China-related M&A transactions slumped significantly, reaching the lowest transaction value since 2013
- Major drivers were: Drop in outbound M&A (dropped 37% in value) and Drop in Private equity deals (dropped 22%)
- Outbound deals have been discouraged by increased scrutiny of CFIUS review in the US; national security review in Europe; Beijing’s controls on outbound capital flows
- Inbound transactions reached US$20bn in 2019, representing a 5.6% growth YoY
- China as a market for US companies: Large inbound acquisitions in China have always been rare; acquisitions by US companies have mostly been small/medium sized
- Impact of the trade war: Punitive actions against China will continue. Even if Trump loses in November, investors don’t expect a significant change in the US approach to China. The tone and tactics will change
- Developments during the pandemic: China becomes a refuge for US companies after overcoming COVID-19. China’s economy is slowly recovering, growing by 3.2% in Q2 2020 as retail and luxury sales experience a strong rebound. The recovery is unbalanced, which has widened the wealth gap
- Hong Kong isn’t over for foreign investors, despite the National Security Law: Hong Kong will remain the hub for inbound and outbound mainland investments
- China M&A going forward:
- In the short term, Chinese investors will be focused on domestic consolidation and less active in outbound M&A. Growth in inbound deals is expected, but a red-hot IPO market and high valuations in China could prevent this from growing fast
- In the medium/long term, we expect frequent sales of family-owned businesses. As China faces rising tension with the US, the PRC Government work to ease regulations on inbound M&A
If you want a copy of the slides, or would like to discuss any of these topics, please contact us.
In the first trading week after the outbreak of the novel coronavirus (COVID-19), health sector performance in China’s capital market was remarkably strong. We look here at long-term impacts on the sector in China, and where the M&A and Private Equity opportunities may lie.
The BDA global Health Sector team has investigated these topics and would like to share our latest findings with you in our latest report.
- COVID-19‘s impact on the global economy is far beyond SARS, with almost 12x confirmed cases globally to date and stricter quarantine measures. While the epidemic in China shows signs of improvement, the outbreak has spread to other parts of the world. We expect the economy in China to rebound strongly in the second half of this year, but the extent of the recovery will depend on the impact of the outbreak on the global economy
- We expect the outbreak to have a positive effect on the healthcare sector development in China. While SARS’ impact on the sector was moderate, we believe COVID-19 will have a longer-term impact, with certain sub-sectors benefiting from favorable government policies and increased private and public health investments
- The preventative, diagnostic and therapeutic solutions for COVID-19 generate explosive short-term demand for related medical products. While the demand spike is temporary, we expect some medical products to experience a transformation to long-term increased demand
- COVID-19 has drastically raised people’s health awareness. It will raise both public and private health spending, and we expect the following subsectors to benefit, generating fundraising and buyout opportunities:
- Vaccines, medical robots, IVD, ICU equipment & devices, online medical consultation, home-based medical devices and OTC medicine
- Healthcare has been a hot spot for PE investments in recent years. We expect industry consolidation to accelerate, creating ample opportunities for both industry players and PE investors alike
- We believe that COVID-19 does not change the “principles” of cross-border M&A in China:
- Outbound deals focus on the acquisition of international brands, products and technology
- Inbound deals focus on entering and capturing markets with strong demand and growth potential
- Overall, COVID-19 outbreak is an opportunity rather than a crisis for capable private equity health investors, especially in certain sub-sectors
Contact BDA Healthcare team, China