In this episode of China Money Podcast, guest Alberto Forchielli, managing partner at Mandarin Capital Partners, discusses China-Europe cross-border deals, the challenges Chinese companies face when expanding overseas, and the mistakes he has made but never regretted.
Listen to the full interview in the audio podcast, or read an excerpt.
Q: First, give us a brief introduction of your fund and its strategy?
A: Mandarin Capital Partners is set up to encourage Chinese companies to invest in Europe, and European companies to invest in China. It’s a bi-lateral fund, cross-border (focused). We have invested all of 300 million plus euro we had. Plus, we did a number of leveraged buyout. So our overall volume of investment has been one billion euro.
Q: For Chinese companies expanding overseas, what are the biggest challenges that they face?
A: First one is to find a good deal. To find a good deal, you have to find out (about the deal) early on. Generally, good deals are done by insiders. So the trouble for Chinese companies is to become insiders.
Secondly, speed. They are not used to do mergers and acquisitions, particularly overseas deals. And also, there are many permissions they have to go through. So they need to sign a temporary contract with a very heavy break-up fee. That puts them at a disadvantage verses international competitors.
Q: Your focus is industrial companies. For this sector, how does valuations compare historically?
A: With the crisis, the multiples have been coming down. We’ve never bought anything for more than seven times EBITDA. We even went down to buy great companies at 3.2 times (of EBITDA), which is unheard of in China. In China, you pay 20, 30 or even 40 times.
(We also buy) companies with technologies, profitable and full of cash. So you can definitely do an incredible multiple arbitrage with those companies. We did an exit yesterday. It was four companies that we bought and merged in the pharma business. We sold one year later at three times of our original investment, only because it was restructuring plus China exposure.
Q: That all sounds great. But I’m sure during this process, you face many challenges and risks. Can you tell us about that?
A: We got where we are, not because we figured everything out, but because we’ve made every possible mistake that can be possibly made. We’ve made them all. The first mistake is when people want to talk to you just to gain knowledge. They want to use you and make you work like crazy. We went through that, and now we are very quick in trying to do a closing.
The second is never co-invest with Chinese companies, because they slow us down. Their process is so slow that what I can discuss with a Swiss lawyer for half an hour takes me two days to explain to my Chinese partner. It’s a big burden. It’s like running a marathon with a 20-kilo bag on my back.
The third thing is not to go after a Chinese who comes to you and says, I want to buy something. Never. Whether it’s a European or Chinese, forget about it. It’s a waste of time. You only have an opportunity when you are in China or Italy (where a company needs to expand overseas), but never the other way around.
About Alberto Forchielli:
Alberto Forchielli is managing partner at Mandarin Capital Partners, a private equity fund that focuses on investing in Chinese and European companies. Primarily, the fund invests in Chinese companies seeking overseas expansion and European companies in search of local presence in China. Among many previous positions, Forchielli was at the World Bank in Washington, D.C. for three years. He was also president for Asia Pacific at Italian industrial conglomerate, Finmeccanica S.p.A.