Deal making in the U.S. is perhaps more competitive than ever. There is little evidence to suggest that this will change anytime soon. Private equity firms secured $338 billion for new funds in the first three quarters of 2017, according to Preqin Ltd. Assuming the momentum continued, 2017 could not only surpass 2016, but may be within reach of the all-time annual private equity fundraising record of $415 billion set in 2007.
With so much dry powder in the market and strong corporate balance sheets, it’s no surprise that there is strong competition for high-quality deals and new entrants to the U.S. market are adding additional pressure. Many of these new players hail from Asia. There are three Asian funds in the market right now looking to raise more than $275 billion. For comparison, the largest fund in the U.S. raised to date was $23.5 billion. In addition to Asian investors raising large funds, there is an overall increase in the number of funds being raised by Asian investors for investment beyond their borders. The majority of these funds are looking for deal opportunities in the U.S. and Europe.
Additionally, Asia-based corporations continue to be aggressive strategic acquirers with the result being a huge influx of deal activity from Asia. “Asia continues to experience record M&A activity with outbound deals surpassing inbound deals as Asian corporations with access to low-cost financing seek high-quality assets in the U.S. and Europe,” says Daniel Wang, a managing director who is leading Harris Williams & Co.’s efforts in Asia. “This trend has been emerging for several years and is expected to continue.”
Chinese-based companies and private equity firms are leading the pack when it comes to Asian buyers completing deals in the U.S. and Europe. In 2016, China became the second-largest global investor behind the U.S. with $104 billion in completed M&A transactions. And that’s just the beginning. China’s global investment footprint is still small relative to its economic size. It is projected that China’s global outward foreign direct investment could average between $140 billion and $275 billion annually over the next decade, according to Case & White.
“Chinese companies are reaching maturity. There has been domestic consolidation and Chinese management teams are much more capable of running large businesses than they have been in the past,” says Wang. “Chinese companies need to find ways to grow, and they are doing that by acquiring assets in the U.S. and Europe.”
Chinese buyers’ appetite isn’t just fueled by the fact that they want growth. They are also looking for ways to capitalize on the burgeoning middle class in China. According to McKinsey & Co., 76 percent of China’s population will be considered middle class by 2022; that’s in comparison to just four percent in 2000. Additionally, the younger Chinese, those under 35, are more willing to spend on material goods. Their consumption spending is growing at a rate of 14 percent a year—twice as fast as the last generation, those aged 35 or older, according to McKinsey.
“Wealth is accumulating and the next generation in China wants a higher quality of life. Investors understand the spending trends and want to buy U.S. brands to bring them back to China,” says Wang.
The top sectors for Chinese outbound investments include industrials, consumer retail, technology and healthcare. Historically, Western brands have a reputation of being safe and of high quality, which puts them in demand with the new generation of Chinese consumers. Illustrating the point: China is now the largest consumer market for fashion retailers Zara and Gucci. Other brands are hoping to leverage this trend. For example, Abercrombie & Fitch Co. recently launched on Alibaba’s Tmall, a business-to-consumer platform for Chinese businesses. And others are looking to take advantage of the automotive industry. China-based CITIC Capital Holdings Ltd. recently invested in Formel D, a Germany-based global service provider to the automotive and component supply industry. Harris Williams & Co. advised CITIC on the transaction.
Chinese citizens are also using their money to travel. Investors once again want to tap into that. HNA Group, a Chinese conglomerate headquartered in southern China, has spent approximately $35 billion on U.S. investments by its own estimates. The company has bought brands like Carlson Hotels, which owns the Radisson Hotel chain and Park Plaza Hotels, and a 25 percent stake in Hilton Worldwide Holdings. Additionally, the company has made multiple investments into businesses in and around the aerospace industry.
“HNA has been the most aggressive buyer of new planes, and it makes sense given that the Chinese are one of the largest tourist groups today,” says Wang. “However, it’s important to note that the Chinese government has started paying closer attention to deals that are not deemed beneficial to the overall growth of the Chinese middle class. And HNA has been called out for its M&A strategy.”
While the competition from Chinese investors is good for sellers in any market, it creates increased competition for U.S. buyers. “They are showing up at M&A process es across the board. Every process has an international appeal today. There is always a consideration for who the Asian buyers could be. Chinese investors are often willing to pay more than their U.S. and European counterparts, and they are willing to go head to head against the competition. Chinese investors have come up the learning curve and are better equipped to participate in M&A processes today than they have been historically. Some Chinese private equity groups have also opened offices in the U.S. The landscape is changing,” says Wang, who adds that the U.S. government is taking a closer look at deals with Asians as buyers of U.S. assets.
In addition to Chinese investors, Japanese investors have become increasingly aggressive in the U.S. market. However, Japanese investors and corporations’ motivation for acquiring U.S. assets is very different from that of the Chinese. Unlike China’s growing population and economy, Japan’s interest rate is fluctuating at 0 to -1 percent—a sign of a staggering economy. Additionally, its population is falling at the fastest pace since such numbers were recorded. As of January 1, 2017, the number of people living in the country fell by more than 300,000, marking the eighth consecutive year of declines, according to government data. What’s more, the number of births in Japan fell 2.9 percent from the previous year—the lowest since comparable data became available. People 65 or older account for 27 percent of the population. Those 14 or younger make up just 13 percent of the population.
According to projections from the National Institute of Population and Social Security Research, the pace of decline will rise every year until 2045, by which time Japan will be losing about 900,000 residents a year — equivalent to a city the size of Austin, Texas.
“Japan is a mature market. The country suffers from the majority of its population being older and it has negative growth,” says Wang. “The banks are encouraging Japanese investors to spend money and financing is very cheap. Investors are looking outside of the country for growth opportunities. The U.S. and European companies are often ripe targets for Japanese corporations as they seek well-established companies that are cash generative and enjoy strong market positions.”
According to Thomson Reuters, in 2016, total M&A transactions in Japan reached $198 billion and over half the volume in 2016 came from outbound deals—a 13 percent increase from the year before.
Given the mature market, the players aren’t new either. Firms like Mizuho Bank, Mitsubishi Motors, Nomura Holdings, Sumitomo Mitsui Banking Corp. and Toshiba Corp. are all active buyers in the U.S. and Europe. For example, Tokio Marine bought out U.S.-based HCC Insurance for $75 billion in October.
“I don’t think you will see a halt in outbound M&A from Japanese investors. They will be aggressive, but smart. They are trying to buy assets where they can bring their own capabilities to bear. They have full-blown management teams, and they are not buying outside their core expertise,” says Wang.
Conversely, while Japanese investors are scouring the U.S. for deals, U.S. investors are doing the same in Japan as they look for companies to purchase that tap into the country’s aging population. Private equity firms like Bain Capital, Carlyle Group and Blackstone Group are all competing for deals in the country. Healthcare is a sector of particular interest.
With recent political turmoil and a continued downturn in global trade, Korea is expected to see a weaker GDP growth over the next five years at 2.3 percent. Korea has lagged behind Japan and China in cross-border M&A and has a history of poor performing deals. Korean companies are often not as eager to venture to the U.S. or Europe because consolidation opportunities still exist in the domestic market. However, with stagnant domestic growth and a low cost of financing, large Korean family conglomerates, known as chaebols, that are cash rich are still keen on outbound M&A. Sectors of interest include industrials, technology and consumer productions, with the U.S. being a key target market. That said, there are only six major chaebols in Korea and they include Hyundai, LG and Samsung, among others.
“Korea is different. You only have six major family businesses and only a handful of them are buyers of foreign assets. It’s not like in Japan and China. In Korea, you know who the buyers are and they mainly focus their activity in Asia,” says Wang.
ASEAN (Association of Southeast Asian Nations) countries with rising GDP and a young and growing population are dominated by large family-controlled conglomerates flush with cash looking for technology, name brands or products they can bring back to their domestic markets. Some active acquirers include Thailand’s food company Charoen Pokphand Foods Public Company Ltd., Monde Nissin,
a consumer goods company in the Philippines, and Singaporean sovereign wealth funds like Temasek Holdings and GIC Private Limited.
“They will continue to be an important buyer group for global assets,” says Wang.
Other markets around Asia will be more opportunistic when it comes to cross-border M&A. “Every year there are a limited number of deals coming from Southeast Asia. Temasek, which has offices in New York, San Francisco and London, is a very active buyer,” says Wang.
Despite investors in some Asian countries being more involved in M&A than others, the region as a whole will remain active and U.S. investors and companies should consider them formidable market competitors. Additionally, as more interest from Asian buyers flows into the U.S. it will likely start having a greater impact on middle market private equity firms and companies.
“As Asian buyers continue to look for quality assets, the middle market will undoubtedly start seeing more M&A activity involving Asian buyers,” says Wang. “While this will be good for sellers looking to achieve outsize returns, it will make the M&A market even more competitive for buyers. It’s an interesting dynamic that we will continue to watch unfold.”
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