H&QAP in China private equity deal

H&Q Asia Pacific (H&QAP), a private equity and venture capital firm, announced Wednesday that it has paid around $45 million for 43.3% of Yuchai Engineering Machinery, a mid-sized company specialising in small excavators based in ChinaÆs Guangxi province.

ôThe construction boom in China makes excavators good business, and Yuchai Engineering is the market leader within China in the small excavator sector. We are confident that past growth rates of more than 30% on both the bottom and top lines will continue,ö says Ta-lin Hsu, chairman of H&QAP, who did not divulge Yuchai's revenue figures.

Yuchai Engineering is a subsidiary of the Yuchai Group, which has a diesel engine manufacturing subsidiary listed on the New York stock exchange. Yuchai Group is 100% owned by the Yulin city government in Guangxi.

The capital injection has occurred at the operating company level, not at group level. It will later be divided into shares, following adoption of a shareholding structure. Once this happens, Yuchai Engineering will be owned 43.3% by H&QAP and 51% by Yulin Group; with the balance held by a state-owned venture capital group. No existing shareholder is exiting the company as a result of the transaction.

ôWe have injected fresh funds. The other shareholders are actually being diluted by this deal," says Hsu, who adds that no large-scale layoffs are envisaged. ôThe company doesnÆt have any fat. In fact, there is a shortage of skilled labour because we are growing so fast,ö he says.

Nor does the company carry a social security burden, according to Hsu, who describes the company as ævery cleanÆ.

H&QAP is looking at an exit strategy by initial public offering in two to three years. This could be in China, depending on the valuation, but more likely abroad. Hsu added that he thought that a foreign IPO was a more likely scenario than being acquired by a foreign firm.

Previous private equity deals, such as the Carlyle GroupÆs effort to buy 85% of Xugong Group Construction Machinery for $375 million in November last year, have been stymied by Chinese fears of selling majority stakes in strategic assets to private equity groups, which might then flip on the assets to foreign buyers.

Hsu emphasised that the company has obtained all the necessary permissions ahead of the announcement. ôEverything has been cleared and approved. There is no chance of the deal being reversed. The money has already changed hands,ö he says. ôOur small excavators (between 1 and 13 tonnes) are not as strategically sensitive as XugongÆs heavy duty excavators (30-40 tonnes),ö he says.

H&QAP began working on the transaction around six months ago, after being introduced to the company by a financial institution. No auction or tender process was involved. ôWe liked the management a lot,ö says Hsu. "While the chairman is an appointed career civil servant, other key staff are experienced professionals, he says.

H&QAP staff will obtain the vice-chairmanship position, as well as the chairmanships of the compensation committee, and the finance and auditing committee. These three positions all carry board seats, which number 12 in total. Andrew Kuo, head of greater China and MD of H&QAP, will be vice chairman and executive committee member.

ôWe are not taking over managerial control. The whole point was to buy into a successful firm that did not need a massive amount of restructuring,ö says Hsu.

The proceeds of the deal will be used to acquire machinery to expand production.

H&QAP Pacific is a former joint venture with Hambrecht and Quist that today handles assets of over $2 billion.