Buyouts in China: A "Boy Who Cried Wolf" Fable

By Zhaoqi Li

Edited by Jing Liu

A New Chapter for an Old Fairy Tale

In late autumn 2008, the sale of XCMG Group finally collapsed: after five years of drawn-out negotiations, Carlyle was not the winner. With regulatory approval still pending, XCMG announced that its contract with Carlyle XCMG had expired.

This state-owned enterprise, founded in 1989 and based in Xuzhou, Jiangsu Province, had reached annual revenue of nearly 4 billion RMB by the turn of the century. It was a prominent player in China's construction equipment industry, poised to benefit from the country's massive infrastructure build-out and the coming golden decade of real estate.

Like Newbridge Capital and Blackstone Group, Carlyle was among the first foreign funds to arrive in China. In 2005, Carlyle offered $375 million (roughly 3 billion RMB at prevailing exchange rates) for an 85% stake in XCMG. Based on XCMG's EBITDA of about 230 million RMB around that time, this implied a valuation multiple of nearly 13x.

The bid was grounded in reason. "By developed-market standards, this valuation was perfectly sensible, but in China, it was a number without imagination," an investor who competed for the deal told Anyong Waves. In hindsight, this assessment holds up: in the decade-plus after 2008, XCMG's revenue would grow more than 20-fold, with net profit reaching 5.6 billion RMB last year. XCMG arguably needed strategic growth capital more than anything.

But the deal fell through before it ever got off the ground. On June 8, 2006, Xiang Wenbo, chairman of Sany Heavy Industry — XCMG's largest competitor at the time — published a blog post excoriating the potential sale as a case of state asset flight, declaring his willingness to outbid Carlyle by 30%. Public opinion swiftly turned against Carlyle. The following month, a hearing organized by China's Ministry of Commerce effectively sounded the death knell for what had been the largest foreign acquisition in China at the dawn of the 21st century.

Looking back, XCMG's failure stemmed from multiple factors: commercial (the valuation was not particularly compelling), ideological (nationalist sentiment), and the defensive reflex of domestic firms protecting their own interests. This failure would cast a long shadow over China's buyout market for years to come.

In the history of global commerce, buyouts are a business easily mythologized or demonized anywhere in the world. Compared with financial investing, executing a buyout is a journey of "eighty-one tribulations": it demands sophisticated financial engineering, but also navigates human loyalties, shareholder interests, employee welfare. In XCMG's case, it even touched upon national face — problems no one could have anticipated.

Over the past two decades, China's PE funds have had at least three relatively systematic windows for buyouts —

The first came shortly after China's WTO accession, when state-owned enterprises grappling with global competition or seeking new growth created distinctly Asian acquisition cases like Newbridge's takeover of Shenzhen Development Bank, or CDH Investments' consolidation of China Glass.

The second wave arrived as foreign capital came to acquire Chinese factories or local brands, seeking lower production costs and greater market access. According to EY's estimates at the time, financial and strategic investors were roughly split: the earliest case was the 1999 acquisition of Nanfu Battery, when Morgan Stanley, together with ING, GIC, and CDH Investments, formed a platform company to acquire 53.725% of Nanfu Battery, becoming its controlling shareholder — this was also CDH's first investment after spinning out from CICC. Four years later, in 2003, Morgan Stanley and other investors transferred control of China Battery to American conglomerate Gillette.

The third wave emerged after 2010, but these deals were more like probabilistic outliers. In 2017, Shan Weijian led the privatization of Yingde Gases, an opportunity born from infighting among three aging founders. That same year, Hillhouse Capital's acquisition of Belle International revealed a company wrestling with generational succession and digital transformation. KKR's 2019 acquisition of NVC Lighting's China business stemmed from the controlling shareholder's other listed platform needing an urgent capital infusion.

Yet even representative cases like Shenzhen Development Bank or Belle remain vanishingly rare in China: according to Anyong Waves' statistics, over the past 20 years, there have been fewer than 60 large-scale (target valuation above $1 billion) buyouts driven by market-oriented PE funds in China, half of which have since failed or remain in limbo.

The head of a dollar-denominated buyout fund told us that today, the number of funds capable of systematically executing large acquisitions in China with full post-investment "buy and build" teams is "no more than five," and the number of professionals with over five years of experience and at least one completed deal leadership role above 3 billion RMB is fewer than 50 — almost all with dollar-fund backgrounds.

Only in 2019 did the situation begin to loosen. That year, the Negative List for Foreign Investment Access (2019 Edition) signaled a policy shift toward allowing foreign majority or wholly-owned control in more sectors. Simultaneously, the dismal post-IPO performance of numerous new-economy companies led more PE funds to consider migrating from growth-stage investing to buyouts, hoping to find more traditional but cash-flow-generative businesses.

Bain Capital's acquisition of Chindata, PAG's acquisition of Hisun Pharmaceutical, and KKR's acquisition of NVC Lighting's China business all occurred that year. Another positive signal: Hillhouse's acquisition of Belle International, which spun off and listed its Topsports unit — the latter achieved a valuation of 70 billion HKD post-listing, reinforcing market understanding of buyouts' cyclical resilience.

Huaxing Capital's 2019 statistics showed that buyout transactions initiated by financial investors in China reached $39.8 billion, up 36% from $29.2 billion the previous year. This momentum continued: by 2021, at least seven $1 billion-plus buyouts had occurred. Hillhouse Capital's $3.4 billion acquisition of Philips' small appliance business, its $1.4 billion purchase of AI Dream mattresses, and春华资本's acquisition of Mead Johnson infant formula, among others.

Many articles have proclaimed "the coming spring of buyouts in China," but the reality is that even today, this moment has not truly arrived. Especially following the bursting of the US stock bubble, not a single buyout case occurred in China in the first half of this year. Yet certain capital market signals are indeed accelerating buyout potential: significantly diminished growth investment opportunities; mega-funds' ever-larger single-fund sizes (such as Hongshan's $9 billion fund); the gradual aging of the previous generation of entrepreneurs; and, theoretically, a more robust cadre of professional managers.

Will this "boy who cried wolf" story end differently this time?

Three Flavors of Buyout Funds

Before discussing buyout transactions, we might first examine China's M&A market.

M&A is, to a large extent, a market dominated by strategic buyers — this is the pattern seen in mature markets like the US as well. American corporate history over the past century is virtually synonymous with M&A history. Yet buyouts initiated by financial institutions (typically PE funds) — our focus here — distinctly demonstrate capital's transformative contribution to society and the commercial environment.

In China, PE-driven buyouts have long been viewed as a niche industry. For the primary market, opportunities created by technological and market expansion have proven far more attractive than buyout returns.

China's buyout funds broadly fall into three categories:

The first includes established PE firms built on buyouts like KKR and PAG, or sector-focused teams like L Catterton in consumer. Their defining characteristic: steady, unflashy execution — KKR, for instance, operated in China for years without an in-house PR manager. The most apt description of such funds may reference the industry assessment of Shan Weijian: "deeply understands the rules, but never overpays."

The second category comprises PE firms that have crossed over from growth-stage investing to buyouts in the past five years. Hillhouse Capital exemplifies this group. Zhang Lei shot to fame with Belle International's privatization, propelling Hillhouse into rapid expansion. Chunhua Capital, FountainVest Partners, and others subsequently joined this cohort. Yet broadly speaking, their investment logic differs from traditional "bargain-hunting" buyout thinking: their thesis is that it's expensive now, but will be even more expensive later. Of the 14 buyouts above 1 billion RMB that we tracked last year, five carried valuations exceeding 20x EBITDA — whereas consumer brands historically average 10-15x EBITDA long-term, and more traditional industrial businesses trade at 6-10x.

The Belle case is emblematic. Unlike conventional buyouts involving aggressive cost-cutting and operational streamlining, Hillhouse founder Zhang Lei publicly stated they never sought to improve efficiency by slashing costs — rather, they would increase investment to grow the pie. Zhang also rarely emphasized Hillhouse's control of Belle to the media, even praising Belle's management efficiency to deliberately downplay this aspect. This diverges somewhat from traditional buyout transactions' extreme emphasis on "separability of people from assets."

The third category consists of RMB-denominated buyout funds. In earlier years, state-backed entities like CITIC and CICC were active across numerous SOE restructuring projects. In the past five to ten years, while RMB-led buyouts have produced some representative cases — such as KKR's $1.073 billion acquisition of Quanyi Health last year, a retail pharmacy chain incubated from scratch by Cornerstone Capital's fourth fund — they remain sparse compared to dollar-fund-driven acquisitions. This predicament largely stems from most players' insufficiently deep pockets.

There are also some outliers.

CDH Investments, for instance, demonstrates stronger industrial binding willingness and capability compared to the above three. It helped WH Group acquire American pork producer Smithfield for $7.1 billion, then jointly initiated with Joyoung's parent company Shanghai Lihong the acquisition of American mid-to-high-end floor cleaning and kitchen appliance brand SharkNinja. This acquired asset was subsequently merged with Joyoung to form new holding company JS Global Lifestyle, listed on the Hong Kong Stock Exchange in late 2019. CDH is also the second-largest shareholder of this new company.

In CDH's cases, most involved assisting Chinese companies in large overseas acquisitions. A dollar-fund buyout head told Anyong Waves that "CDH's approach resembles helping mature companies expand through M&A and enjoying the dividends of their entrepreneurial revival." To some extent, such buyouts resemble growth investments: "while there's an obligation to provide escort services, often you can only sit in the passenger seat."

The reason China's buyout funds present these distinct profiles is, of course, shaped by market dynamics.

On the funding side, typical buyout fund lifespans run at least 5-10 years, with capital commitments exceeding those of typical VC and growth-stage funds. China has chronically lacked long-duration institutional capital; domestic PE fund investment periods typically span only 3-5 years, with greater focus on pre-IPO rounds, making buyout attempts difficult.

On the asset side, Chinese entrepreneurs have experienced only two relatively distinct generational transitions, compared to overseas markets where generational succession has created systematic deal flow. This is evident in last year's $1 billion-plus buyout cases being predominantly overseas targets.

Where Does Excess Return Come From?

Ask a buyout veteran how to judge a deal's quality. He'll tell you: Every deal is the right deal at the right price. The investment industry's "buy low, sell high" principle is even more nakedly exposed in buyout transactions.

Anyong Waves analyzed over 20 well-known Chinese and international buyout cases and found that the biggest, most imaginative acquisitions often fail to represent "excess return." A significant proportion of these cases derived from policy-driven industry reform opportunities — in China, these themes are called "SOE restructuring"; elsewhere, from high-barrier licensed businesses; and in the US, largely from legal redefinitions of financial instruments.

A representative case is KKR's post-subprime crisis acquisition of Sunrise Senior Living. Before 2008, US senior housing, like other residential assets, primarily used REITs for asset securitization — profits came from collecting rent. But senior housing typically offers far more value-added services than conventional residential properties: nursing, wellness, medical care, and so on. After 2008, US markets permitted REITs to own senior care facilities and hire third-party teams to manage these assets for fees, making the relationship between REITs and senior housing projects more akin to a hotel owner and hotel management team — an innovation known as the RIDEA structure.

Following this structural change, KKR partnered with HCN (a REIT) to take Sunrise private for approximately $2.1 billion, then split it. KKR put up only $102 million for Sunrise Management (the value-added services business) plus a small portion of assets, while HCN received Sunrise Real Estate Company and most major fixed assets. KKR then recovered an additional $50 million in cash within a year by restructuring a small portion of assets under the management company. Under recycled capital principles (funds recovered within 12 months through asset sales, etc., are treated as never having been deployed), KKR effectively acquired the Sunrise services target for just $52 million on a financial basis.

In this transaction, KKR used no leverage. The brilliance lay in transforming the industry's asset-rent model into the more "sexy" management-fee financial model. The Chinese parallel would be real estate companies spinning off property management units — such as Country Garden's 2018 separation of its property services arm, which now trades at 17x P/E versus the parent company's 2.6x, with market capitalization nearly matching the developer itself.

Over the following two years, as KKR and HCN drove expansion by integrating more senior care assets, Sunrise Services' revenue jumped from $22 million to $45 million annually. Ultimately, this seemingly traditional real estate acquisition generated a 5x return for KKR within two years upon exit.

A more representative China case is the privatization and return of China Biologic Products. Its buyout logic was more direct and concrete than Sunrise's. China Biologic operates in China's highest-barrier industry — blood products. Since 2001, China has approved no new blood product manufacturers, creating an oligopolistic market structure. The privatization was ultimately completed last year at $120 per share by a consortium led by Centurium Capital and Hillhouse Capital, valuing the company at $4.75 billion. While exit has not yet been realized, one can imagine the valuation uplift this company — which traded at depressed valuations on US markets — will see on A-shares or Hong Kong.

Shan Weijian's PAG represents a certain buyout fund tradition: conventional, grounded, cautious. His 2017 acquisition of Yingde Gases (an industrial gas producer) arose from share-allocation disputes among three aging founders. PAG then practiced mixed-ownership reform by acquiring Baosteel Gases, a peripheral Baosteel business, and ultimately drove the two companies' merger. This five-year transaction produced a 1+1 far greater than 2 effect. According to Reuters reports last year, the merged Yingde-Baosteel Gases entity was valued in the $10-12 billion range.

From these cases, it's not difficult to see that buyout funds' ability to traverse cycles relies on precisely calculated certainty of value creation through transactions. When markets grow uncertain, these "limited certainties" may be the most valuable commodities.

Another consensus on buyout excess returns derives from the buy-and-build philosophy.

After the 1987 stock market crash, US markets began examining buyout funds that survived the disaster. A 1995 Harvard Business Review article profiled one PE firm that escaped market devastation: Clayton & Dubilier (CD&R). Its core success in harsh market environments stemmed from designing a breakthrough business management methodology, including multiple management equity stakes and new incentive compensation schemes — now standard at every buyout fund. Moreover, partner Joe Rice noted their distinction from most firms: CD&R focused on transformation, not acquisition. This has since become standard buyout fund rhetoric.

The upgrade to US buyout buy-and-build philosophy was subsequently driven by the 2000 dot-com bust, which created abundant cheap SaaS software channel consolidation opportunities. US software buyout funds Vista Equity Partners and Francisco Partners were both founded around 2000.

A typical transaction was Vista's 2005 acquisition of MDSI for $70 million, followed two years later by its $240 million acquisition of Indus, after which the two smaller companies merged to form Ventyx. Vista subsequently rolled in Global Energy Decisions, NewEnergy Associates, and Tech-Assist. Through integrating and operating these companies, Vista dramatically increased cross-selling product volume and market share with existing customers. But unlike traditional retail channel roll-ups, software buyouts require stronger operational and product-level interoperability to achieve post-merger scale effects.

China's technology-driven buyout opportunities have emerged from the maturation of O2O models pushed by numerous internet companies. A quintessential growth-fund stepping stone into buyouts has been: digital transformation and operational capabilities. This includes the aforementioned Belle International and Quanyi Health, into which Hillhouse and others poured massive human and financial resources to help traditional enterprises upgrade.

China's M&A Market and Future

Perhaps Henry Kravis, KKR's founder and arguably the first financier branded a "barbarian at the gate," never imagined that his Chinese counterparts' first impulse after completing a great buyout would not be to pop champagne on their new territory, but to grab the company seal and leave quickly, completing the business registration change as soon as possible. Because no one knows what might happen if the seal were left in the acquired company's safe overnight.

In Eastern culture, corporate control transitions seem more prone to surprises. On one hand, the controlling party must be offered a satisfactory price and emotional comfort; on the other, core management's anxieties about the future must be assuaged, while also addressing numerous demands from other minority shareholders. Yet at the final moment of closing, these massive deals resemble nothing so much as unimaginative traditional trade: the founder or legal representative hands over the company seal representing corporate authority, while the acquirer wires payment to the seller's account. Cash on delivery — this is the most fascinating scene in Chinese corporate control transitions.

In China, even after acquiring control, the buyer still needs at least three of four elements — legal representative, board resolution, shareholder meeting documents, and company seal — to complete business registration changes, after which their control receives legal protection. If a seal is "stolen" at a sensitive moment, it's typically treated as internal corporate conflict, outside public security jurisdiction, requiring judicial recourse. But amid lawsuit delays stretching years, the company's business has long since evaporated. This is one of the important lessons Chinese companies have taught "barbarians." Compared to the US, where buyouts are most active, an acquirer need only obtain majority equity and board control to largely declare complete dominion over a company.

The above reveals a fuzziness in asset perception and definition that seems not yet fully developed, or clearly consensual, in Chinese business values. This is often described as Chinese companies' poor "separability of people from assets." The prevailing consensus on future Chinese buyout opportunities points to generational transitions among entrepreneurs. But our statistics show that more listed Chinese companies are now seeing post-85s and post-90s generation chairs, with operations predominantly led by internally promoted executives. In fact, from the US experience, generational succession-driven acquisition opportunities more commonly explode at third or fourth-generation transitions. For China, this will require considerably longer waiting.

Where will China's greater buyout opportunities lie for buyout funds?

From a sector perspective, among startups spawned by China's booming venture capital industry — from B2B to vertical industrial digitization, AI technology and applications, new energy vehicle supply chains and autonomous driving, semiconductors, industrial smart manufacturing, and healthcare — numerous rapidly growing unicorns have emerged, yet most remain unprofitable.

As buyout funds have attempted some internet company buyouts — such as PAG's acquisitions of Zhenai.com and Weichuanbo, or CITIC Capital's acquisition of cosmetics platform UCO — these transactions have largely failed to produce visible outcomes today.

Returning to buyout funds' traditional perspective, in consumer sectors — the proverbial "long slope with thick snow" — buyout funds today are pondering: if transaction opportunities arise for Heytea or Nayuki, is there reliable margin of safety, what price would be appropriate, and how would the old shareholders who were bought out at high valuations feel? For online-focused new consumer companies that sprinted early, channels offer little premium space, and most lack stable cash flows — starting over might cost less. When they look at SaaS software, concerns center on order stability, whether these orders attach to people or companies, and whether they're sufficiently distinctive amid largely interchangeable competitors.

To some extent, due to higher transaction costs, "systematic buyout opportunities" may not necessarily exist in any region at any time. This is a significant point of departure from growth investing. More opportunities likely come from "bargain hunting."

For Chinese funds aspiring to enter buyouts, too many questions remain unresolved.

Image source | Visual China

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