Nexus Point Capital has raised $475 million for middle-market buyouts in Greater China. The team, led by ex-MBK Partners executive K.C. Kung, favors complex solutions over plain vanilla deals<\/p>\n\n\n\n
Jumao, a Chinese manufacturer of homecare medical devices ranging from wheelchairs to oxygen concentrators, faced a dilemma in three parts: it required additional capital for growth; some corporate restructuring was necessary to position the company to realize this growth; and the founder wanted liquidity for personal reasons, but not so much that he was willing to sell all of his equity.<\/p>\n\n\n\n
Nexus Point Capital, a Greater China-focused mid-market buyout firm established by former MBK Partners executive Kuo-Chan Kung, came in with a package solution that addressed all these needs. And having persuaded the founder to relinquish a majority stake in part by outlining the potential for value creation, it moved quickly into the execution phase. The ex-China CEO for business services at multinational R.R. Donnelley was drafted in by the deal lead, Min Li, to drive this effort.<\/p>\n\n\n\n
\u201cHe immediately recommended de-bottlenecking the manufacturing process so capacity could catch up with orders. Some companies, when they reach a certain size, they get stuck \u2013 they have plenty of customers, but they can\u2019t upgrade their organization in a way that supports a bigger business. We are improving internal processes and systems and hiring the right people so the company can get to the next level. EBITDA grew by 50% last year and we expect a similar level this year,\u201d says Li, who spent five years with Bain Capital in China before joining Nexus Point as a co-founder.<\/p>\n\n\n\n
This transaction encapsulates the challenges confronting a generation of mid-size Chinese companies that can no longer rely on the tailwinds of strong economic expansion. It represents a huge opportunity for private equity but one that many firms might not be conditioned to capitalize on. Buyouts of this nature involve a combination of nimbleness, networks, and operational nous. Most of those that boast these tools have long since moved into the large-cap space.<\/p>\n\n\n\n
A hard sell<\/strong><\/p>\n\n\n\n Jumao is one of three investments made so far by Nexus Point, which is set to close its debut fund at $475 million. The other two are Burger King Taiwan and respiratory care products manufacturer GaleMed. Once LP co-investment in these deals is factored in, Nexus Point\u2019s total assets under management surpass $500 million. Consumer, healthcare, and business services comprise a relatively concentrated sector mandate.<\/p>\n\n\n\n Targeting an underpenetrated market segment means low entry multiples, but it can be difficult to sell the strategy to LPs \u2013 as evidenced by Nexus Point falling short of its fundraising target. \u201cIf you are doing growth capital, you don\u2019t need to convince anyone about your investment strategy; you just need to convince them you\u2019re the best at executing it,\u201d says Kung. \u201cOn the other hand, not many people talk about mid-market buyouts because few people are doing them. It took some time to convince LPs that there are a lot of deals available.\u201d<\/p>\n\n\n\n Quantifying the size of China\u2019s mid-market buyout opportunity is not straightforward and there is no uniform approach. Nexus Point\u2019s take is this: China accounts for about two-thirds of Asia\u2019s $1 trillion in annual M&A; excluding outbound and internal corporate restructuring deals, the China-related total is $200 billion; and based on experiences in other markets, 10-20% of that \u2013 $20-40 billion \u2013 should be addressable by private equity.<\/p>\n\n\n\n Age and time are among the more nebulous factors. Chinese founders are getting older, they don\u2019t necessarily have children who want to take over, and making money is harder than before. \u201cIf your margins have fallen from 50% to 25% and EBITDA margins are contracting as well, then the bottom line isn\u2019t growing much,\u201d says Kung. \u201cIt\u2019s a different market and people must think about operations, but most don\u2019t know about that. They need to find a partner to help them or just sell out.\u201d<\/p>\n\n\n\n Seeking complexity<\/strong><\/p>\n\n\n\n Nexus Point eschews \u201cplain vanilla\u201d transactions where 100% of a company is available in favor more complex situations in which the founder stays on as a partner. This means there is less upward pressure on valuations. Cleaning up the shareholder base is a common feature, although this could involve an array of structures that address different objectives, from taking out existing financial investors to facilitating exits for one or more out of a group of founders, with the rest wanting to remain.<\/p>\n\n\n\n Businesses in which the founder is intrinsically linked to the value of the brand are less interesting because in certain cases Nexus Point prefers to replace the founder as CEO. This happened with GaleMed. \u201cIt is difficult to exercise control if your partner is the CEO and legal representative of the company,\u201d Kung observes. One solution is to professionalize the management team over time by convincing your partner it is the right thing to do. You say to the founder: \u2018Your value is in strategic and board-level oversight \u2013 we\u2019re both shareholders and we should have professionals come in and create value for us.\u2019 Then you let the founder hire the CEO.\u201d<\/p>\n\n\n\n These moves are redundant without the ability to build a replacement management infrastructure. Nexus Point supplements its team of about a dozen investment professionals, based in Hong Kong and Shanghai, by bringing in specialists on a deal-by-deal basis. The firm is building a network of executives who can be called upon for these tasks, most of them drawn from its partners\u2019 networks.<\/p>\n\n\n\n Just as Li brought in the former R.R. Donnelley executive, Bruno Mercier was hired to work on Burger King Taiwan thanks to a relationship with Kung that dates to their McKinsey & Company days. Mercier went on to serve as CEO of Sun Art Retail Group, China\u2019s leading hypermarket operator, and now he is helping drive Burger King\u2019s rapid store expansion program. Another seasoned executive is being lined up for GaleMed.<\/p>\n\n\n\n The relative paucity of local management talent that can be parachuted into businesses underlines the fundamental human challenge of private equity buyouts in China, whether building internal competencies or outsourcing. \u201cMost Chinese GPs go for investments that are short holds with an IPO exit,\u201d Kung notes. \u201cWe have longer holding periods, more hands-on value creation, and normally a trade sale exit. It requires a different set of skills and there aren\u2019t many people in the middle market who have them.\u201d<\/p>\n\n\n\n To see more articles like this, please get in touch with Gaurav.Nayak@acuris.com or call +852 2158 9672.<\/p>\n","protected":false},"excerpt":{"rendered":" Nexus Point Capital has raised $475 million for middle-market buyouts in Greater China. The team, led by ex-MBK Partners executive K.C. Kung, favors complex solutions over plain vanilla deals Jumao, a Chinese manufacturer of homecare medical devices ranging from wheelchairs to oxygen concentrators, faced a dilemma in three parts: it required additional capital for growth; […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[10],"tags":[],"table_tags":[],"acf":[],"yoast_head":"\n