Private-equity giants are hoping China will lead them into a new golden age.
In a chase for profits and business diversity, three of the largest private-equity firms — KKR, TPG Capital and Permira — are forming an alliance with the China Development Bank set to be announced today, a source close to the situation said.
The move will help P-E firms expand overseas at a time when the number of opportunities to acquire US and Western European companies through leveraged buyouts is drying up.
“I see huge benefits,” the source said. “CDB will learn the private-equity business and get a nice return on their investment, [while] the private-equity firms will get access to CDB’s 30,000 corporate relationships.”
With $800 billion in assets, CDB will announce it’s launching an investment arm out of Hong Kong, China Development Bank Capital, that will partner with all three firms.
As part of the arrangement, China’s bank is expected to take a direct minority investment in TPG of less than 5 percent, while the agreement with KKR involves cooperation, in the form of a memorandum of understanding with CDB, to help each other when appropriate.
TPG founder David Bonderman told the South China Morning Post last month that Asia, and specifically China, is becoming an important place to invest.
TPG, for one, might just appreciate the Asian tie-up.
In 2007, the firm raised a $4.5 billion Asian fund, and as of March 31 has invested about two-thirds of its capital, generating a negative 2.2 percent annual return, according to the CalPERS pension fund.
Former TPG Asian dealmaker Weijian Shan, who left the firm last year, told Private Equity International that buying companies on the mainland is hard because Chinese economic growth does not necessarily translate into better performance by companies.
He also said that sellers “have to trust you and your reputation.”
KKR has had more success, on paper, than TPG with its $4 billion 2007 Asian fund — a 15 percent annual return according to CalPERS — but so far has returned very little money to investors.
The CDB partnership may bear similarities to a strategic alliance formed between the China Construction Bank and Charlotte, NC-based Bank of America in 2005, said New York University economics professor Michael Spence. BofA took a 9 percent stake in CCB as part of that deal.
Although the Chinese knew that BofA would make a fortune, and it did when it sold shares this year, they were prepared to make the trade because the alliance helped them learn how to build a global commercial bank.
Then, in the following year, Goldman Sachs invested in Industrial & Commercial Bank of China and, like BofA, sold much of its stake this year for huge profits.
CDB is known as the government’s policy bank, investing in infrastructure, highways and utilities in countries in which China has a strategic interest. However, it is barely profitable.
“China wants to dramatically increase its outbound investments,” Spence said, and could learn how to invest like a buyout firm by working closely for a time with the industry giants.
KKR and TPG reps declined to comment.