Asian Venture Capital Journal | 19 September 2019

In teaming up with China-based Estun Automation to acquire a European industrial technology asset, China Renaissance Capital Investment is pursuing a different kind of growth capital deal

Private equity investors have deployed $290 billion in China since 2016. Approximately half of this money has been channeled into technology, media and telecom (TMT) deals. In 2018, the share was nearly two-thirds as 18 tech transactions – most of them involving internet-related businesses – of $500 million or more were announced. This was more than in the previous two years combined.

China Renaissance Capital Investment (CRCI) is part of a subset of GPs that eschews opportunities of this nature in favor of more traditional technology plays that support Chinese companies going out and foreign businesses coming in. It’s a strategy very much in tune with the country’s needs, but not many people are hearing the song. “The perception is that outside of technology unicorns, China doesn’t offer enough investment opportunities,” says Mark Qiu, CEO of CRCI.

The firm recently completed its second cross-border collaborative buyout, teaming up with Estun Automation, a Chinese electrical components manufacturer that has expanded into industrial robotics, to acquire German welding technology specialist Carl Cloos Schweißtechnik for EUR190.1 million ($209 million). The first was a EUR545 million carve-out from Robert Bosch, targeted in tandem with Zhengzhou Coal Mining Machinery. A third is pending regulatory approval.

These two deals follow are cut from the same cloth in terms of structure and alignment. CRCI identifies the target asset, helps its Chinese partner with negotiation and execution, and takes a minority stake in the business. The GP’s downside protection is a put option against the partner – and because the partner is listed, the put is easily enforceable. Qiu sees this approach as a natural evolution of growth capital.

“There are three common flaws to growth capital. First, you are financing capacity expansion, and even if you do everything right, the fundamentals are largely driven by the activity of others in your space. The space can become overinvested, and investments do poorly. Second, the founder-entrepreneur isn’t likely to sell, so exit options are limited. Third, in the founder-entrepreneur’s eyes, you don’t bring much to the table. They established the business; they know it well.”

Influential voice

The key to collaborative buyouts is being an invaluable partner, which hinges on understanding what the Chinese company needs. Estun, for example, generates most of its RMB1.46 billion in revenue from motors and computerized operating systems used in industrial manufacturing. However, the company is looking to build its competence in robotics and smart manufacturing systems. It had previously made two acquisitions in Europe, but nothing on the scale of Cloos.

Estun’s ambition dovetails with China’s industry 4.0 goals. The government has indicated that it
wants the smart manufacturing equipment industry to generate RMB3 trillion in revenue by 2020, double the 2017 level. The target for industrial robot output is 100,000 units by 2020.

“We spend time getting to know the supply chain landscape and we identify aspirational enterprises – companies that want to achieve something, not just get listed and make money,” Qiu explains. “For a collaborative buyout to succeed, we must ensure the industrial knowhow and business growth opportunities make sense. That requires deep insight, not only into the target companies outside of China but also personalities and culture.”

CRCI started working with Estun in 2016 and settled on Cloos as a target last year. China’s manufacturing sector is moving from thin sheet to thick metal – a consequence of graduating from refrigerators to heavy machinery – and the ability to cut and weld materials is highly prized. Cloos makes welding robots and machinery. It has a workforce of 700 and 50 locations globally, including nine production plants. It posted EUR144 million in revenue for the 12 months ended October 2018.

The company wasn’t for sale, so CRCI had to convince both parties of the industrial rationale. “Acquirors can appreciate how a deal has the potential to lift them above their peer group, albeit with risks, which we can help mitigate. Sellers must appreciate you are not just owning them as a trophy, you are bringing new life to the asset,” Qiu explains.

The private equity firm’s insights into how Estun could incorporate Cloos’ welding technology into its operations extended from new business development to practical integration challenges. For example, the Chinese company went from having renminbi-denominated revenue to operating in multiple currencies. This helps bring a new complexity to working capital borrowing requirements, cash flow planning, and raw materials exposure.

Signature strategy

Cross-border collaborative buyouts are expected to become a pivotal strategy for the private equity firm, even as Chinese investment in overseas industrial technology assets becomes more politically charged. It comes down to identifying businesses that are unlikely to upset regulatory sensibilities yet meet the needs of manufacturers that want to take their capabilities to the next level and access a global customer base.

Qiu observes that China produces 30 million automobiles a year but does not have an indigenous auto components supplier with a global customer base, because it was a latecomer to the market. Financial investors with the appropriate knowledge and skillsets can potentially help them close the gap through the acquisition of assets that would otherwise be out of reach.

“I sometimes refer to our current operation as merchant banking,” he adds. “You don’t find it in the US and UK anymore, but in the old days, merchant banks knew their clients very well. They could address the entire process of origination, negotiation, and execution, not only taking care of deal-related legal issues but also cultural and psychological issues.”