MBK sees allure in China buyouts

SHANGHAI (Reuters) - Buyout firm MBK Partners sees ample investment opportunities in domestically focused Chinese consumer and industrial firms as the world's fourth-biggest economy grows wealthier, but it is bracing for higher asset prices amid fierce competition and a roaring local stock market.

North Asia-focused MBK also expects more private equity-invested companies to exit through IPOs on China's surging local bourses as Beijing looks to mop-up excess market liquidity.

The recent turmoil in global credit markets, which has disrupted takeover deals in Europe and the United States, is more muted in Asia due to deep local-currency financing markets, Kuo-Chuan Kung, MBK Partners' co-founder and head for Greater China, said at the Reuters China Century Summit on Tuesday.

"If you borrow Asian currencies ... the market is very much open still," he said.

"If you go to international banks, it really is a case-by-case basis," he added.

MBK, created in 2005 by former Carlyle Group CYL.UL Asia Chairman Michael Kim and other executives of the U.S. fund, including Kung, is one of the most active buyout funds in Asia, targeting China, Taiwan, Japan and South Korea.

China has been a frustrating market for private equity funds, which are keen to turn around poorly run state-owned entities or invest in fast-growing industries, as Beijing has prevented deals involving a wide range of sectors it considers sensitive.

Buying controlling stakes has proven especially difficult, meaning buyout firms -- which typically seek control -- have had to be content with minority holdings in China.

MBK, which closed a $1.56 billion fund last year, has yet to make an investment in a Chinese company, although Kung said potential deals were in the pipeline.

"It's really a growth story in China. China's big and many industries are available," said Kung, adding that MBK was interested in big companies that are domestic market leaders.

"Three years ago it was difficult to find growth investment opportunities -- minority stakes in a company that would require more than $50 million," he said at the summit at the Reuters office in Shanghai.

Now, he said, "we're finally seeing sizeable companies coming up".

RISING VALUATIONS

China's benchmark Shanghai Composite Index .SSEC has more than quadrupled since the beginning of 2006. Sellers of companies are becoming more demanding.

"Is valuation going up because people tend to give a value to higher growth, or because of competition they are bidding up asset prices? A bit of both, frankly. Valuation going up is a fact that we have to live with," he said.

MBK, South Korea's biggest home-grown buyout fund, competes in Asia against global heavyweights such as Carlyle and Blackstone Group BG.UL but is keeping its focus on Northeast Asia, the region it knows best, Kung said.

Its investments thus far have been mainly in South Korea and Taiwan, and it recently announced its first deal in Japan.

One of the hurdles to buyouts in China has been a lack of exit opportunities, as China's domestic share markets were effectively closed to listing by private equity-invested firms, although that is changing.

Western Mining Co. (601168.SS), in which Goldman Sachs' (GS.N) private equity arm holds 8 percent, recently raised $816 million in a Shanghai IPO.

"Many private equity funds are looking into A-share IPOs because that seems to be where the valuation is, and that's what the government is encouraging businesses to do as a way to soak up excess liquidity," he said.

"In fact, we're all looking at it. I wouldn't be surprised (if) very soon you will see some financial-sponsored companies go IPO on the A-share market," he said.

The value of private equity deals in Asia, excluding Japan, is $15.3 billion so far in 2007, compared with $18 billion for the whole of last year and $5.4 billion in 2005, according to data firm Dealogic.

Despite the recent credit market storm, MBK sealed a deal to buy Japanese business software firm Yayoi Co from Livedoor Holdings Co Ltd for $610 million in late August, its first deal in Japan and its latest investment.

Kung also said the credit market turmoil could make buyout targets cheaper.

"As financing becomes more difficult, it may actually depress valuations," he said.

But he added that financing was on track for the Yayoi deal as deep-pocketed local banks were still happy to lend.

MBK has completed buyouts worth $2.1 billion in Asia excluding Japan since 2005, ranking sixth among private equity funds during the period, according to Dealogic.