Overseas direct investment (ODI) from China reached a record $68 billion in 2011, and could reach as much as $800 billion by 2016, according to A Capital, a Beijing-based private-equity fund for such outbound investment.
A Capital spent nine months developing a new database tracking Chinese ODI that stretches back to 2001, when China joined the World Trade Organisation – at that time Chinese ODI was under $7 billion.
Its team went deal by deal, including any transaction valued above $5 million and involving a stake of more than 5%. Investors include sovereign wealth entities such as China Investment Corporation, state-owned enterprises and private companies. It does not include portfolio investments under China’s qualified foreign institutional investor regime.
A Capital was established in 2010 to co-invest with Chinese companies in European companies. It has a €200 million fund dedicated to European mid-cap opportunities for Chinese investors, as well as one of the first renminbi-denominated foreign PE funds in China, and the first one authorised to invest overseas. This fund has been granted a Rmb3 billion quota and is still raising assets.
Last year it helped Fosun take a minority stake in Club Med and get a seat on the board of directors, to help Club Med develop a mainland China brand and business.
The surprise from the Dragon Index, as the ODI barometer is called, is the extent to which Chinese ODI has shifted from the US to Europe, says Andre Loesekrug-Pietri, managing partner at A Capital.
In 2011, Europe surpassed the US by taking 34% of Chinese ODI, valued at $10.4 billion, a year-on-year growth of 250%. The US saw its share fall from $7.2 billion of deals in 2010 to $3.2 billion of new investments in 2011.
This reflects several factors. First, Chinese companies tried to find bargains in the wake of the 2008-09 market crash. Those deals rarely succeeded, because the buyers were not experienced in restructuring and were doing so against sustained economic headwinds.
Second, these are not trophy acquisitions, nor efforts to build positions in the West. They are attempts to acquire technology, resources and brands that can be used to compete in the domestic Chinese market.
Third, these deals can bring European companies both entry to China, as well as access to Chinese financing.
Chinese banks such as ICBC are opening branches across Europe, but they are unlikely to lend to companies where they lack a relationship.
But they are far more prepared to lend to a company with a familiar (Chinese) equity stakeholder. In an environment of credit tightening due to the eurozone crisis, such access can become a competitive advantage for European companies.