Private equity has its detractors in nearly every country. In many cases, there is a discomfort at “foreign” investors who perceived to only care about the bottom line and are liable to cut and run within a matter of years.
This is given an added twist in China when state assets are at stake – no one wants to be accused of selling out on the cheap. Just remember how the critics railed at the stellar profits made by foreign banks that bought in ahead of the big Chinese banks’ share listings. And these foreign investors could at least claim they were offering banking expertise.
With this in mind, the recent finding by PricewaterhouseCoopers that foreign firms are being forced to pay more than local rivals in mergers and acquisitions isn't surprising.
These foreigner mark-ups on prices that are already being inflated either directly or indirectly by strong equity markets has seen domestic Chinese investors emerge as the key growth drivers.
According to PwC, the number of China M&A deals rose 19.9% year-on-year during the first six months of 2007. Domestic firms accounted for 63.4% of the total volume and 59% of the total value, up from 53.1% and 41.2% respectively in the first half of 2006.
Most of these deals are classified as strategic, with foreigners still ruling the roost in PE and venture capital (VC). Even here, though, domestic firms are making inroads, albeit from a low base.
In the long-run, it is only natural that a vibrant domestic PE and VC environment should develop in China. Investing in Chinese firms means negotiating a business culture at times far removed from Western values and governed by an opaque and arbitrary set of rules.
So what does this lead to – M&A with Chinese characteristics? Possibly. Yet in a country still in need of principled corporate direction, there are worse things than a foreign voice on the board that rigorously pursues the interests of those he represents to the letter of the law.