admin | 01.17.17

China: The Liberalization of the Reminbi, and Investing in High Risk Offshore Sectors

Over the past few years, such policies have inherently been relaxed due to the liberalization of the RMB and the inclusion of the RMB in the basket of currencies which make up the IMF’s Special Drawing Right (“SDR”). Ultimately, such developments are expected to contribute to the goal of achieving global reserve currency status vis-a-vis the RMB.

Whilst the liberalization of the RMB is a long term objective, short to medium term volatility in the global currency markets has placed the RMB under pressure and has resulted in a sharp depreciation versus other major global currencies. The continued interest from Chinese corporates to acquire overseas assets has further exacerbated a weakening RMB given the need for RMB capital outflows to finance such transactions. As such, the Chinese government have recently introduced a number of new measures designed to curb the level of capital outflows, including:

  • All transactions greater than $5 million require State Administration of Foreign Exchange (“SAFE”) approval (previously, only forex transfers worth $50 million or more needed to be reported to SAFE); and
  • Large transaction (greater than $1 billion) are, in principle, difficult to impossible to execute under the new restrictions.

The new policies are, in part, designed to prevent malicious capital transactions (i.e. moving RMB offshore to protect from further currency devaluation) and to curb the outflow transactions under certain risky areas. Specifically, the administrative authorities have tightened the supervision of investment made to offshore sectors including real estate, lodging, cinemas, entertainment, and professional sport clubs. In addition, the following types of transactions will attract closer scrutiny from the authorities:

  • Large transaction to invest in non-operating business sectors;
  • Investments made by limited partnerships;
  • Equity sale of the offshore target subsidiary is larger than the parent’s business; and
  • Corporates engaging in outflow transactions shortly after establishment.


In light of the above, we would recommend Chinese corporates to make prudent investment decisions especially when investing in high risk offshore sectors or adopting risky investment arrangements as mentioned above.

During the announcement of the new rules, the Chinese government has also restated its principle to encourage authentic and compliant outbound investment and will adhere to its “going out” strategy and “one belt one road” initiative. Therefore, our view is that the recent regulations tightening capital outflows will only temporarily impact outbound investments. From a long term standpoint, such restrictions are expected be relaxed once the currency has stabilized and the foreign currency reserve is managed at a healthy level. It is also worth noting that for those Chinese corporates that have already started their outbound investments, they could also utilize their offshore funds for re-investment to mitigate against such new restrictions.

Finally, despite the new foreign exchange measures bringing more restrictions and administrative burden to outbound investments, the trend of outbound investment is expected to increase as the Chinese economies continues its transformation from a low cost manufacturing country to a value add, high tech manufacturing and domestic consumption orientated economy.


As the current Chinese economy has limited domestic investment channels outside of real estate, more and more Chinese capital is expected to be invested in offshore assets. This is consistent with the current trend – according to the PRC Ministry of Commerce, China’s non-financial outbound direct investment (ODI) is likely to reach USD170.11 billion in 2016, which represents an increase of 44.1% compared to 2015. In contrast, foreign direct investment (FDI) into China will total RMB813.22 billion, which is a 4.1% from 2015.


admin | 04.18.16

The 10 Year Evolution of Global Private Equity Investing

As we look back over the last 10 years since the inception of the Global Transaction Advisory Group at Alvarez & Marsal, there has been both an evolution and maturation in the private equity investment model during the period.  In the more mature markets such as North America and Western Europe, this has largely resulted from the worldwide financial crisis of 2008; the shifting dynamics of emerging markets in such places as Latin America, India and China significantly influenced private equity investing in those regions as well.

Prior to the financial crisis of 2008, with soaring stock markets and real estate values, the availability of cheap debt to finance deals and generally less competition, private equity investing in North America and Western Europe was a game of buy low, sell high and improve returns largely though financial engineering.  However, post-financial crisis the game has changed dramatically – with private equity buyers facing intense pressure to deploy capital resulting from a massive capital overhang along with an extended low interest rate environment – these factors have driven up valuations tremendously.  Today, in order to create alpha, private equity investors in these regions are required to buy high and sell even higher – creating value and hence returns by enhancing their investments through operational performance improvement initiatives.

The emerging markets of Latin America, India and China have been influenced by different variables.  At the beginning of the historical 10 year period, private equity investing in these regions relied heavily upon riding minority investments to exit through the ever-rising public markets (IPO).  However, over the last few years, with these regions being impacted by currency devaluations and political instability, public markets have crashed closing the IPO window indefinitely.  These factors, when combined with  an increasing level of competition as more private equity investors expand globally in search of lower valuations, have caused the investment model to mature into that more like North American and Western Europe.  Accordingly, private equity investors are demanding control investments in these regions whereby they can effectuate positive changes to their investments again largely through the use of operational performance improvement initiatives.