Submitting a EUR 654m (USD 762m) take-private bid for EuroGroup Laminations last month, FountainVest Partners sought to fuse past and future.

Ten years ago, the firm acquired US-based automotive components supplier Key Safety Systems (KSS) and oversaw a China expansion. Now, the plan is to do the same with Italy’s EuroGroup in the electric vehicle (EV) space. It is a potentially transformative opportunity: China sold 31.4m cars last year and 40% of them were EVs; the US recorded half that volume with EV penetration of 10%.

“The fundamental thesis we have is the vast China market. While there is significant apprehension about China, we think it’s such a big market, if you operate well with good products, brands, or services, you should do very well,” said Frank Tang, chairman and CEO of FountainVest, who declined to comment on deal specifics.

“When anyone says foreign businesses aren’t making money in China, they are downplaying those who are highly successful in China.”

The private equity firm has agreed to acquire a 45.7% stake from EuroGroup’s founding family and 7.9% from Tikehau Capital. This will be followed by a tender offer aimed at delisting the company, after which the founders will reinvest a portion of their proceeds in the business.

For FountainVest, the echoes are not limited to automotive parts. It has completed a string of “China nexus” deals, leveraging its roots as a China-focused investor to snare ex-China assets. These include the USD 5.2bn take-private of Finland-headquartered Amer Sports, which subsequently re-listed in the US two years ago and now trades at a USD 21bn valuation.

Ever more of FountainVest’s peers are looking to do the same. According to S&P Global, Chinese private equity firms had deployed USD 9.6bn in US and European deals as of mid-June. This compares to USD 7.1bn in 1H24. A lawyer with a global firm noted that these transactions account for 30%-50% of his pipeline, up from 20%-30% last year.

“Chinese asset managers have increasingly looked abroad for opportunities, partly due to pressure from international LPs and partly to seek new markets amid challenges in focusing solely on China,” added Betty Yap, a partner and global co-head of financial sponsors at Linklaters.

“The common issue faced by many Chinese asset managers is that they are less familiar with offshore jurisdictions. Deal sourcing is already a challenge. The other issue is how they can compete successfully against the incumbents in those jurisdictions.”

Wider remits

Seven out of eight private equity firms approached for this story – all investors wholly or largely associated with China – claimed to have embarked on cross-border buyouts early in their histories. However, these transactions have become more prominent in their portfolios in recent years.

KSS and Amer Sports were in FountainVest’s second and third funds, respectively. Fund IV, which closed in 2022, features not only EuroGroup, but also New Zealand pet food brand Ziwi and Japanese jewellery chain Tasaki. The latter was USD 646m joint acquisition with Unison Capital last year.

Hillhouse Investments has completed at least 15 overseas control deals, stretching across India, Japan, Singapore, South Korea, Australia, and Europe, according to AVCJ Research. Nine of these are post-2020 transactions. In contrast, there have been no domestic buyouts in the past 18 months.

To some extent, branding has shifted in line with deal flow. Websites may describe firms as “global” or “international,” or simply drop any reference to China – given the sensitivities it arouses in certain markets around the world might become a competitive disadvantage.

Primavera Capital Group: an Asia Pacific-based global investment firm. DCP Capital: an international private equity firm founded by experienced investors in Asia. FountainVest, Hopu, and YF Capital broadly identify as Asian private equity firms, while Boyu Capital describes itself as “headquartered and domiciled in the Cayman Islands.”

The likes of CPE, Trustar Capital, and Ascendent Capital Partners retain references to China and international in their branding.

Most confirmed they still follow a China investment mandate with varying degrees of flexibility to pursue overseas deals. “If a firm calls itself international, there must be some reason. From Fund I, we have clear terms in our LPA [limited partnership agreement] that we can allocate a proportion of corpus to ex-China deals with China-related angles,” one manager said.

Serena Tan, deputy chair of Morrison Foerster’s global private funds practice, observed that, in certain cases, fund documents have been worded loosely enough for GPs to make overseas investments with no China angle at all. LPs haven’t stood in their way, provided there is confidence in the team and its competencies. Meanwhile, it is generally agreed that the definition of China nexus has loosened since 2020.

This could be linked to an evolution in the cross-border narrative. There is a two-decade history of China GPs investing overseas, ranging from Trustar’s local teams – and funds – targeting the US and Japan to Cathay Capital’s initial Sino-France strategy. Along the way, groups such as Sailing Capital, Hony Capital, and CDH Investments have dabbled in cross-border deals with mixed success.

These managers were selling a story based on rapid Chinese growth and low-hanging fruit for foreign companies. Neither rings as true today, so China nexus has grown to encompass Chinese founders setting up businesses overseas, leveraging Chinese engineering and supply chain advantages, collaborations with Chinese portfolio companies, and even buying from Chinese vendors.

J&T Express is arguably the stand-out example of follow the founder. Established in Indonesia in 2015 by the former country CEO of Chinese mobile brand Oppo, it targeted Southeast Asia’s e-commerce boom before expanding into China with backing from Boyu, Hillhouse, and HongShan.

Centurium Capital made its cross-border debut earlier this year, reasoning that industrial automation player Ruhlama could achieve global growth through the marriage of German engineering excellence and Chinese manufacturing expertise. The company has existing exposure to China, but Centurium relocated the headquarters to Singapore as part of a supply chain diversification effort.

Perception problem?

Japan, Australia, and India are on the agenda, as well as Southeast Asia and Europe. Sector coverage is also diverse, taking in healthcare, technology, infrastructure, consumer, industrials, education, and financial and business services. Healthcare topped S&P Global’s 1H25 rankings with USD 8.5bn deployed across 29 deals. Technology was second on USD 411m and 39 deals.

While there is a preference for buyouts, given these afford greater influence over exits, minority growth equity, PIPEs, and convertible bonds routinely pop up as deal types.

Commenting on the wider use of the China nexus tag, Philip Hu, a founding member and managing director of Primavera, pointed to the breadth of the country’s economy and the depth of its supply chains. India may have surpassed China as the leading supplier of iPhones sold in the US, but only as the point of final assembly, he said. China still manufactures 1,000-plus components.

“You asked about defining the ‘China angle.’ May I turn this around and ask, what is a ‘US angle’ or even an ‘India angle’?” Hu said, “They’re labelled, ‘Made in India’ but that is hardly the full picture.”

The LP perspective, meanwhile, is often tinged with scepticism. This is especially the case when managers are suspected of rebranding themselves for the purposes of fundraising, cognisant that allocations to pure China strategies are being scaled back.

“As we already have country-focused managers in each of the major PE markets, with deep networks and track records, we would prefer not to have China-based GPs compete against those managers for overseas deals,” said Sean Yoo, a partner and head of APAC at Federated Hermes.

“At the same time, we would be less comfortable with overseas country-focused managers hunting for deals in China against other experienced Chinese managers.”

In this context, GPs must demonstrate a right to win when going cross-border. LPs rely on evidence-based processes when underwriting China nexus strategies, so they want to see a history of relevant deals, a clear rationale in terms of why managers pursued these assets and how they won them, and updates that demonstrate execution of the investment thesis.

“Can you introduce this strategy by explaining where you added value to the Western company’s manufacturing using your capabilities in China? How did the value-add play out, and how well is the business doing?” said Chris Loh, a managing partner at Axiom Asia Private Capital.

“You need data points to show the LPs, so they have something to evaluate. You can’t just talk like a Series A start-up with a piece of paper.”

Loh is open-minded about Chinese GPs rebranding as global, noting that fund management would be one of numerous industries in which Asia has emerged as a competitive force. Regardless, Axiom digs into the concept of cross-border, assigning different levels of risk based on the execution challenges.

The lowest risk would be an investment in a Chinese company that has Chinese customers and wants to develop a client base overseas. The risk level dials up when companies are physically entering new markets – perhaps establishing an office in Singapore to target Southeast Asia – and again when they engage in cross-border M&A and need to integrate unfamiliar assets to realise synergies.

Gradualist approach

Ocean Link, which invests in tourism, hospitality and related technologies, has progressively moved through these levels. Overseas success for a portfolio company, travel lifestyle platform DragonPass, which has built a global enterprise client base, was instructive in mapping out last year’s acquisition of UK classifieds platform Gumtree. The latter deal featured China’s 58.com as a strategic partner.

“When we invested in DragonPass, we looked at its competencies because Chinese companies tend to compete abroad on price. We discovered that engineering prowess was the key driver behind its market share acquisition overseas,” said Tony Jiang, a co-founder and partner of Ocean Link.

“We realised this was something we could explore further, so we decided to apply it to other verticals we have been familiar with.”

The firm took a similar staged approach with hotels. Its first foray overseas was the acquisition of a minority stake in Europe’s Ruby Hotels in 2017, which was partially exited to InterContinental Hotels Group (IHG) in March. A debut control deal, for Japan’s HotelMonday, came last year. This was done in partnership with Delonix Group, a Chinese hotel group and an existing portfolio company.

Jiang describes Ocean Link as a China-related private equity firm that has become more international in scope, with cross-border investments serving to broaden the deal flow. He claims that LPs are supportive of this strategy because it brings diversification, offers flexibility regarding exits, and most importantly, it is encased in iron-clad discipline.

Specifically, Ocean Link has pledged to avoid pure-ex China businesses. Last year, it turned down deals involving assets in the US and Australia because there was no value add relevant to the firm.

Other GPs are also sticking to what they know. For Ascendent, a nimbleness around cross-border investment coexists with a concentration on industrials. Early exposure to Nano Resources, a China-based supplier of high-speed rail components, helped inform a 2019 investment in Bochumer Verein Verkehrstechnik (BVV), a German manufacturer of wheels and related components for trains.

BVV has evolved from having a Europe-centric customer base to supplying China’s latest generation of high-speed trains, with profits more than doubling during the holding period. Alutrim, a specialty aluminium business carved out from a German conglomerate in 2022, is on the same trajectory.

Ascendent tends to eschew auctions in favour of using its industrials expertise as a calling card, prompting Leon Meng, the firm’s founding managing partner and CEO, to suggest that direct competition with European mid-cap private equity firms is unlikely.

“The main reason owners sell a business to us or partner with us is because of our China expertise and experience. We have proven capabilities in helping companies outperform in China, which remains a great growth engine for the right sub-sectors,” he said.

FountainVest’s Tang takes a similar line, observing that assets he might pursue in Europe tend to be of little interest to European GPs. Sometimes, they discount the China element entirely – unable to underwrite any upside – whereas FountainVest identifies it as an opportunity.

Resources required

There are, however, managers pursuing global deals where there is little or no China angle, according to multiple advisors. These often involve US-based assets, and they are transacted quietly. In such scenarios, telling a strong global story is essential.

“What matters now is being a well-established, recognized sponsor who can say, ‘We’ve executed a series of deals in this sector and adjacent sectors, we have deep hands-on knowledge and industry connections, and we will take all of that and combine with our funding capabilities to help grow the business – including, if relevant, in China and Asia’,” said Yang Wang, a partner at Simpson Thacher.

Hillhouse is a case in point. Several sources close to the firm said there is an emphasis on applying industry expertise in areas such as healthcare, irrespective of geography. Nevertheless, the focus is still more pan-Asian than global. At least 30% of its fifth buyout fund, currently in deployment, will end up in China or China-related deals.

Indeed, China has loomed large in the underwriting for Hillhouse’s biggest post-2020 investments. These include Versuni, an appliances business acquired from Philips in 2021, and last year’s buyout of Dulwich College International. Hillhouse won out in the latter process because it was willing to take the China schools whereas rival Blackstone wanted to carve them out, the sources said.

At the same time, Hillhouse has invested heavily in its ex-China capabilities across investment and portfolio management, picking up talent from various global peers. A Japan team is currently being assembled. Moreover, newly established platforms in real assets and private credit – Rava Partners in 2020 and Elham Credit Partners in 2023 – have been international in outlook from the beginning.

In contrast, Ascendent has no offices outside Greater China, preferring to rely on its existing capabilities. FountainVest is somewhere in between, with teams on the ground in China and overseas, an internal operations group, and an advisory network. For example, the former CEO of KSS has helped EuroGroup on several China expansion initiatives.

Hong Kong-headquartered LionRock Capital is also making the transition from China growth equity deals to cross-border buyouts, emboldened by a successful rejuvenation of UK shoe brand Clarks. Global brands looking to scale up in China and Asia are the prime targets. Karen Lai, a managing director at LionRock, emphasised the importance of advisors with sector specialist experience.

“We partnered with Li Ning [founder of the eponymous Chinese sportswear brand, on the Clarks deal],” she said. “He is a strong strategic partner who not only provided part of the capital, but also has a powerful network, brand-building expertise, and deep operational know-how in the footwear space, and Li Ning’s own turnaround story has also been very compelling.”

On a fundamental level, bad advice can lead to poor asset selection. Depending on the situation, industry, and target jurisdiction, a China angle might threaten rather than enable deals. Technology, media and telecom (TMT) businesses in the US immediately come to mind, given national security concerns, but industries such as education can also be problematic.

Investor and advisor sources point to situations where private equity firms with China ties have taken majority positions in US companies and occupy seats on boards, yet participate as passive investors, giving local management teams full operational autonomy. However, even these structures, devised before China-US geopolitical relations deteriorated, have become more challenging.

“It’s not that they aren’t interested in US assets, but regulations create uncertainty, especially in TMT. They may structure themselves as passive investors, but this won’t stop their counsel flagging the risk, so they need to strike a balance between risk and return,” said Julie Fu, a partner at Clifford Chance, citing carve-outs of US businesses as a popular risk mitigation method.

Staying the course

Asked about the impact of de-globalisation and inward-looking industrial policies – and the accompanying prospect of closer regulatory scrutiny of cross-border deals – most private equity firms said they envisaged no strategic shift. They will continue to pursue investments in China and overseas, and they declined to be specific on the split between the two.

Hu observed that Primavera made its first foray overseas in 2015, before the first Trump administration, let alone the second. The approach has not shifted despite various macro upheavals.

“We have not made cross-border investments in response to current, complex market conditions, or done them as a means to reduce China exposure. Before any investment, regardless of geography, we are careful in asset selection and consider what our value-add might be,” he explained.

“On China, we have been consistent since inception. Even when unpopular, we have continued to highlight the medium to long-term mega trends and investment merits in China across innovation, urbanisation, and the growing middle-class. This was our view on day one and it won’t change.”