Europe’s largest PE: China’s venture capital scene is vibrant enough, M&A market begets new opportunities

China’s merger and acquisition market is still immature, which makes it an interesting opportunity for private equity firms like Eurazeo.

China might have one of the world’s most vibrant venture capital market, with participants like large and traditional venture capital funds, boutique funds, and corporate CVCs, racing find the next Alibaba or Pinduoduo, however, according to Marc Frappier, managing partner of European PE fund Eurazeo, the country’s merger and acquisition (M&A) market has yet to mature hence begets opportunities.

Eurazeo, one of Europe’s largest private equity fund, is a global fund with operations across the world. It has offices in Shanghai, New York, London, Frankfurt, Madrid, Brazil and Argentina. It has US$20 billion in assets under management. Unlike funds who rely solely on institutional funds, Eurazeo operates via a dual-funded model; it invests its own money and has skin in the game.

Its scope of investments and acquisitions covers everything from startups to large-scale businesses to real estate.

At a recent media briefing with the company, Eurazeo managing partner Marc Frappier talked about the firm’s achievements and objectives in China.

 

Eurazeo’s investment style

Eurazeo seeks to finance firms with growth potential; helping businesses to scale up and speed up their transformation process. On average, each investment cycle lasts between 4 to 5 years and the firm generates an internal rate of return of 8-12% for private debt; 20-25% return for private equity.

Christophe Bavière, a managing partner at IdInvest, an investment firm acquired by Eurazeo earlier this year, further elaborated on the concept of growth potential. He said in the digital age, companies today have to think global from day one. There is no longer the concept of a domestic market for businesses. The global market is an important consideration when gauging a firm’s future trajectory.

On the flip side, handling cultural differences drives the success or failure of a company as it expands abroad. Europe for instance, with its highly fragmented market, is more similar to Southeast Asia than it is to China. This fragmentation slows down the growth process and one example is the adoption rates of cashless payments in Southeast Asia as opposed to China.

Fragmentation could have slowed down Europe itself. Europe is behind the US in the venture capital space despite having a comparable GDP size; comparable supply of scientist, engineers, and entrepreneurs. A highly fragmented Europe means it is far harder for business models to be replicated across different countries. A strong European Union and digitisation might remedy that, Bavière and Frappier argue.

Latin America, they point out, offers many great opportunities, but its laws, taxes, and culture makes it hard to do businesses there. Frappier said working with locals who understand the market actually goes a long way to tackle those difficulties.

 

China’s M&A opportunity

“China’s merger and acquisition market has not yet matured,” says Frappier. He notes that a majority of the funding comes from venture capitalists and private funds. This means there’s an opportunity in joining the game when the market is still relatively small. Currently, he has seen no more than 10 Chinese M&A companies. “These are prominent funds that manage up to US$2 -10 billion”, he adds.

Bavière highlighted the importance of being aware of much-hyped spaces like fintech, blockchain technology, and artificial intelligence. All of these, regardless of the country, tend to fetch a higher price and can be really expensive, meaning a higher jump in valuation is necessary to generate returns. Such investments need careful consideration. In general, technology investments are still cheaper in Europe than in the US. In China, he argues, valuations can be very subjective and it is essential to have the right connections.

 

Editor: Nadine Freishlad & Ben Jiang