China SWFs ramp up direct investment into Europe

Chinese outbound investment into Europe could exceed $250 billion in the eight years to 2020, with domestic sovereign funds and private equity firms increasing their proportion of capital flows into the recession-hit region.

China direct investment in Europe is expected to double to $20 billion this year, from $10 billion in 2011. It represents a leap from $3 billion invested in both 2009 and 2010, and $1 billion annually between 2004 and 2008, according to a study by US research firm Rhodium Group and Chinese bank CICC.

Chinese direct investment in Europe is forecast to grow to an annual average of at least $20-30 billion from 2012-20, according to the report. Its figures are based on data collected on Chinese greenfield and M&A transactions in Europe since 2000.

Private entities – defined as having at least 80% of non-government ownership – account for a majority (63%) of deals. The top three private investors from 2010-11 were automaker Zhejiang Geely Group (which acquired Volvo in 2010), telecoms equipment supplier Huawei Technologies, and PC maker Lenovo Group (which bought German electronics company Medion last year).

State-owned entities account for one-third of deal volume, but represent 72% of the total value of deals between 2000 and 2011. China Investment Corporation (CIC) tops the list of state-owned investors, followed by Yantai Wanhua Polyurethanes and China National Petroleum Corporation.

China’s sovereign funds “have kept a low profile to date when it comes to direct investment stakes, but their activities are ramping up”, finds the report. It mentions that China’s National Social Security Fund could commence direct investments into Europe, in line with its plan to increase allocations to overseas assets.

Another sovereign, Guoxin Asset Management – an investment arm under the State-owned Assets Supervision Administration Commission – “has reportedly secured $10 billion of funds from the central bank to support Chinese firms going abroad”, says the study.

Commercial interests were the main driving force for outbound investments, with Chinese entities largely seeking to acquire European technology or well-known brands.

Additionally, “quality investment opportunities within China are becoming harder to find”, as over-investment has created bubbles in sectors such as property development. This contrasts to the deal climate in Europe, where discounted assets are expected to be disposed of by cash-strapped corporations and governments.  

“Several other government-controlled entities have also recently started to channel foreign exchange reserves through private equity structures into direct investment stakes in Europe,” the report notes.

It cites the example of Mandarin Capital Partners – a PE firm founded by Chinese and Italian partners. It has taken stakes in several European companies, with the deals partly financed with capital from China Development Bank and China Exim Bank.

Another Sino-European private equity firm, A-Capital, is managing a PE vehicle that was launched last month by CIC and sovereign fund Belgian Federal Holding Investment Company. The A Capital China Outbound Fund aims to take minority stakes in mid-sized European businesses in industries that have strong growth potential in China.  

Private equity capital is expected to “open another channel for private flows”, as will investment funds and high-net-worth investors, says the report.

It would be in Europe’s best interests to keep the door open to Chinese investment, given that they are driven by commercial -- and not political -- motives, the study authors suggest. They recommend the implementation of tailored investment schemes to “help Chinese investors overcome the hurdles they have in entering mature market economies”.

The report foresees other developing nations following in China’s path, noting: “Securing the right policy response is crucial, given the potential for future investment flows and China’s role as test case for a wider range of emerging market investors.”