By Aaron Back
BEIJING--China's overseas investment surged in the first quarter
of this year to $21.4 billion as state-owned companies snapped up
resource-related assets around the globe, according to a report by
a private investment firm that counts China's sovereign wealth fund
among its partners.
China's total overseas investments more than doubled from a year
earlier, according to estimates by A Capital, a private-equity firm
based in China and Paris that takes stakes in European companies
alongside Chinese investors. That figure includes mergers and
acquisitions, as well as greenfield investments, or construction of
new plants and facilities.
Last year, A Capital identified some emerging trends, such as
growing investment by private-sector companies. But investment in
the first quarter was dominated by a more traditional pattern of
Chinese state-owned companies investing in energy and resources
companies in places like South America and Africa.
The report also showed sustained interest in Europe by Chinese
companies, a trend that continued from last year, as ongoing
sovereign-debt woes on the Continent have created opportunities for
investments at depressed valuations.
State-owned companies accounted for 98% of all deal value in the
first quarter, a new high and up sharply from 53% in the first
quarter of 2011, A Capital estimated in its quarterly Dragon Index
on China's outbound investment. Resources and energy deals
accounted for 92% of the total, up from just 24% a year
earlier.
State-owned firms, which enjoy preferential access to financing
from state-controlled banks, may find it easier to make deals amid
unstable market conditions. The dominance of state-owned firms in
the first-quarter figures "show more difficulties for private firms
to seize large opportunities in an environment characterized by
both volatility and strong competition for good assets," A Capital
said in the report.
South America was the top destination for investment during the
first quarter, at 43% of total foreign merger-and-acquisition
activity by Chinese companies.
The biggest single investment during the period was the
acquisition by China Petrochemical Corp. (600028.SH), or Sinopec,
of a 30% stake in Petrogal Brasil, the Brazilian subsidiary of
Portuguese oil company Galp Energia SA (GALP.LB), for $5.16
billion. The A Capital report counted the investment as one in
Latin America rather than Europe.
Europe was the second-largest destination for investment,
accounting for 16% of outbound M&A. That is down from 37% in
the year-earlier period, but the decline is largely due to the
increased focus on investing in resources.
In the first quarter, Europe accounted for 83% of all
non-resource deals. "This confirms Europe's position as a key
strategic investment ground for Chinese investors," the report
said.
The largest investment in Europe was the 8.7% stake in U.K.
utility Thames Water acquired by China Investment Corp. (CIC.YY),
the country's sovereign wealth fund. The size of the deal was never
disclosed, but A Capital valued it at $779 million.
Two large investments in Europe that have recently been
announced weren't included in the index because they haven't yet
closed: the acquisition of German manufacturer Putzmeister Holding
by Sany Heavy Industry Co. Ltd. (600031.SH) and the acquisition of
a 21% stake in Portuguese power supplier EDP-Energias de Portugal
SA (EDPFY, EDP.LB) by China Three Gorges Corp.
Investment in the U.S. was just $8 million in the quarter, down
from $975 million a year earlier. In a February interview, Andre
Loesekrug-Pietri, A Capital's founder and managing director, said
political sensitivities are holding back Chinese investment in the
U.S., but he expects this may improve after this year's
presidential election passes.
A Capital compiles the report from various sources, including
official data from China, Europe and the U.S., commercial
databases, and its own private research.
In May, A Capital formed a joint investment fund with CIC and
Belgian sovereign wealth fund Federal Holding & Investment Co.,
to invest alongside Chinese firms, primarily in leading European
brands and technologies. The size of the fund wasn't disclosed.
A Capital sees investment in European brands as a way for
Chinese companies to move up the value chain and improve
profitability. In 2010, for instance, it invested alongside Chinese
conglomerate Fosun Group, which took a 10% stake in French resort
Club Mediterranee SA (CU.FR). Fosun is now partnering with Club Med
to open resorts in China.
-Write to Aaron Back at aaron.back@dowjones.com.