Henry Cai's AGIC makes first investment

The veteran dealmaker tells FinanceAsia local expertise is key after his fund agrees to jointly buy German machinery maker KraussMaffei for $1 billion.
(Left to right) Ting Cai, chairman and CEO of China National Chemical Equipment, Frank Stieler, CEO of KraussMaffei Gruppe and Chen Junwei, CEO of ChemChina Finance.
(Left to right) Ting Cai, chairman and CEO of China National Chemical Equipment, Frank Stieler, CEO of KraussMaffei Gruppe and Chen Junwei, CEO of ChemChina Finance.

Working with local partners will help Chinese firms to make acquisitions in Germany more effectively, according to top China dealmaker Henry Cai, after his new investment fund teamed up with two state-owned enterprises to buy a leading German machinery maker for $1 billion.

China National Chemical Corp, better known as ChemChina, and linked up with Cai’s fund and Guoxin International Investment Corp. on Monday to seal a deal to acquire the KraussMaffei Group. The 178-year old German firm makes machinery for processing plastic and rubber, from carbon-fibre-reinforced components on BMW electric cars to insulating layers in Whirlpool refrigerators.

The Chinese consortium is buying KraussMaffei from Canadian private equity firm Onex Corp, which made a €276 million investment in the Munich-headquartered company in December 2012, Onex said in a separate statement that it will receive €670 million once the deal is completed, which is expected in the first half of this year.

"Setting up an office and establishing a local network in Munich helps to differentiate us from our international peers,” said Cai, chairman of Asia-Germany Industrial Promotion Capital and regarded by some in the market as the godfather of Chinese overseas listings.

60-year-old Cai said his AGIC private equity fund set up the Munich office last year to build up its local expertise and deal-sourcing capacity. “Our goal is to help small, advanced manufacturers in Germany, Switzerland and Australia to gain access to the enormous opportunities in China.”

The fund will spend about 70% of its capital in German-speaking countries like Switzerland and Austria, while the rest will be spent in other parts of continental Europe. It will target investments in the so-called Industry 4.0, which includes intelligent production, high-end systems and components, advanced materials, medical equipment, and environment protection technologies.

Thanks to Cai’s extensive network in China, AGIC raised $550 million in October last year towards its $1 billion target. The fund has an anchor investment from sovereign wealth fund China Investment Corp, which was formed in 2007 to help Beijing to diversify its massive foreign-exchange holdings.

"As Chinese labour costs rise, we need to improve our productivity by acquiring the technology know-how and advanced manufacturing in Europe," Cai told FinanceAsia in an interview, echoing the Chinese government's push to lift the economy on to a higher-value footing. ChemChina has also already been an aggressive overseas buyer in recent years, having bought Italy’s tyremaker Pirelli for $7.7 billion last year.

"In the KraussMaffei deal we see high demand from Chinese consumers for their lightweight structural components and carbon-fibre design for automobiles and aircrafts," Cai said.

Before starting his own business venture, Cai spent more than 20 years in the investment banking business in Asia, mostly helping companies to list their shares in Hong Kong, including the 1993 debuts of Shanghai Petrochemical and Tsingtao Beer.

He was most recently Deutsche Bank’s executive chairman of corporate finance for Asia-Pacific and left the bank in February 2015. Prior to joining Deutsche in 2010, he was chairman of Asia investment banking and head of China investment banking at UBS.

No job cuts

In the case of KraussMaffei, Cai and his Chinese partners have sought not to make waves.

“It was a friendly takeover and the management teams of both KraussMaffei Group and ChemChina agree to keep all the staff,” Cai added. The company currently has 4,500 employees globally, of which 2,800 are based in Europe’s largest economy, and has indicated that it plans to increase its workforce in 2016.

Cai said his Europe-focused fund welcomes both minority and majority investments as well as co-investment opportunities if the ticket size is larger than €100 million. He added that the fund is a long-term investor with a minimum investment cycle of 7 years.

The State Council, China’s cabinet, approved “Made in China 2025” in May last year, an initiative designed to transform the country from a low-cost supply chain into an advanced and innovative manufacturing hub through favourable government policies and subsidies.

The average cost of manufacturing goods in China is only 5% lower than in the US and 16% lower than in Germany, illustrating just how Chinese wage costs have been rising steadily, Boston Consulting Group said in a June report. The consulting firm estimates that it will be 2% and 3% cheaper to make goods in the US than China by 2018 as a result of increased productivity.

There has been near double-digit growth in China’s average annual urban wage since 2004, according to China’s Nationa Bureau of Statistics.

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