Is China’s private equity ‘gold rush’ over?

One abandoned bid to start: Billionaire Edgar Bronfman Jr has withdrawn a $6bn bid to take control of Paramount, the latest twist in a chaotic saga over the Hollywood group’s future.

And a high-profile arrest: Telegram has said its chief executive has “nothing to hide” after French authorities detained Pavel Durov over the messaging app’s moderation of alleged criminal activity on the platform, including the spread of child sexual abuse material.

In today’s newsletter:

• Private equity’s China slowdown

• A private credit giant and Chicken Soup for the Soul

• Defence contractors’ money moment

Private equity’s retreat from China

Not long ago, private equity groups were rushing to profit from China’s rapid growth. They followed a simple playbook: buy stakes in fast-growing Chinese companies, then cash out by listing them in the US.

These days, Beijing has cracked down on overseas listings, Washington is restricting investment in some Chinese technology sectors and China’s growth has slowed. All of that comes against a backdrop of geopolitical tension.

So it’s perhaps not surprising that enthusiasm has cooled. DD’s Kaye Wiggins has dug into Dealogic data to find out exactly how much has changed.

Some of the industry’s biggest names such as Blackstone, KKR and Carlyle have put the brakes on China dealmaking this year, it shows.

While China’s rapid growth had fuelled a “gold rush” in the past, said Kher Sheng Lee, co-head of Asia Pacific for the Alternative Investment Management Association, “today, it’s more like panning for gold with a magnifying glass and tweezers”.

Warburg Pincus — once one of the most active US private equity firms in China — has had a marked slowdown. It hasn’t done a deal in China this year and struck just two in each of the previous two years, a stark drop from highs of 18 in 2017 and 15 in 2018.

Blackstone has barely done a deal since 2021, the data showed. The only deal it has recorded in China since then is a proposed move to increase its stake in a supply chain management company it bought five years ago.

It’s a stark finding considering its founder Stephen Schwarzman has been one of the best-known American dealmakers in China, having founded the Schwarzman Scholars programme in the country.

Advent International emerges from the data as one of the more active firms in the country. This year it has invested in Shanghai-based conference and exhibitions group VNU Exhibitions Asia and Seek Pet Food, a Chinese pet food manufacturer.

Buyout groups are shifting their focus in Asia to other markets. At Blackstone and KKR, the Asia heads of private equity are based in Mumbai rather than Hong Kong.

The private credit giant stuck with a messy liquidation

In 2022, boutique investment bank PJT Partners advised on a deal that involved selling American DVD kiosk chain Redbox to the publishing, programming and pet food group Chicken Soup for the Soul.

It was an unlikely marriage — a sort of Frankenstein of 1990s American pop culture. And two years on, PJT is still waiting to get paid.

Chicken Soup filed for bankruptcy this summer with the hope of slashing some of its nearly $1bn of debt. Just a few weeks into the court process, a Delaware bankruptcy judge forced it to liquidate.

Instead of restructuring in court, a war of words broke out between Chicken Soup and its lender, the private capital giant HPS Investment Partners.

The company’s collapse ensnared HPS in a legal mess, and has shocked even distressed debt veterans, DD’s Eric Platt, Amelia Pollard and Sujeet Indap report.

“It’s unavoidable that there’s going to be some number of these private credit deals that need to restructure,” said Andrew Milgram, chief investment officer of Marblegate Asset Management, a distressed debt investor that was not involved in the bankruptcy.

Chicken Soup’s unravelling is a rare blight on HPS’s investment record, and it comes at an inopportune time. The firm — which manages $146bn of assets — is gearing up for a potential public listing or tie-up with a rival private investor.

The story of how the company collapsed is filled with finger-pointing, with one lawyer describing its downfall as a “train wreck like nothing I have seen”. Even before bankruptcy, more than 1,000 employees hadn’t been paid for weeks. Then they abruptly lost their jobs.

HPS still hasn’t reached a deal with the court-appointed trustee responsible for overseeing Chicken Soup’s winding-down.

“It is a bad investment for us,” one person briefed on the firm’s thinking said. “Once every 10 years we have one of these.”

HPS hopes to recoup 50 per cent to 70 per cent on its investment (it claims it’s owed more than $500mn). For less senior creditors, like PJT, the recoveries will probably be far less.

Defence contractors’ money moment

With geopolitical tensions rising across the world, it’s been a lucrative few years for companies in the weapons and defence business.

The world’s largest aerospace and defence companies are set to rake in record levels of cash over the next three years as they ride a surge of new government orders.

Just how much cash? The leading 15 contractors are forecast to generate free cash flow of $52bn in 2026, according to an analysis by Vertical Research Partners for the FT. That’s almost double their combined cash flows at the end of 2021.

That’s likely to have lucrative knock-on effects for investors, who have already benefited from billions of dollars in share buybacks in recent months.

Lockheed Martin and RTX bought back close to $19bn in stock between them last year, while BAE Systems this summer finished a three-year £1.5bn buyback programme — and immediately unveiled another one of the same size.

All that cash sloshing around could lead to a rise in dealmaking. 

Rheinmetall earlier this month announced a $950mn deal for military vehicle parts maker Loc Performance; Czechoslovak Group is bidding for the ammunition business of Vista Outdoor; and BAE Systems last summer paid $5.6bn for Ball Aerospace.

It’s not just the biggest contractors that are benefiting from the conflict in the Middle East and Russia’s full-scale invasion of Ukraine. Silicon Valley is also pushing into defence tech, with some venture capital firms backing military contractors for the first time.

Even still, it might have come as a surprise that Y Combinator — the San Francisco start-up incubator known for helping to launch the likes of Airbnb and Reddit — just backed its first weapons company.

The start-up, Ares Industries, launched last week and pitched its “low-cost cruise missiles” as suited for use in a potential war between the US and China in the Taiwan Strait.

On the YC website, the biography of co-founder Alex Tseng consists of a single sentence: “Missiles are cool.”

Job moves

• Apple has tapped Kevan Parekh, vice-president of financial planning and analysis, as the company’s new chief financial officer. He will replace Luca Maestri, who will step down from the post early next year.

• Mexico’s president-elect Claudia Sheinbaum has chosen academic Víctor Rodríguez to run Petróleos Mexicanos, the country’s heavily indebted state oil company. 

• Paul Weiss has hired Nickolas Bogdanovich as a partner for the firm’s M&A group in New York. He most recently worked at Cleary Gottlieb.

• Latham & Watkins has hired Joe Zujkowski as a partner for restructuring and special situations in New York. He previously worked for Gibson Dunn.

• PAI Partners has hired Livia Carega as a managing director for the client and capital group. She most recently worked for Tiger Global and earlier worked for Apollo Global Management.

Smart reads

Turning the tide Société Générale’s chief executive Slawomir Krupa has for months tried to steer the French bank out of its downward trend. The pressure has only ramped up, the FT reports.

How much for that chromosome? The once high-flying consumer health company 23andMe went public at a $4.5bn valuation. Today it’s valued at less than $200mn. Lex notes it just hasn’t figured out how to operate as a viable public company.

Lay-off influencers Last year’s lay-offs hit hundreds of thousands of white-collar employees. Some of them embraced the loss as their new identity, Bloomberg reports.

News round-up

Venture group G Squared raises $1bn to invest in discounted start-up shares (FT)

Nvidia results to show Wall Street how AI chip boom is faring (FT)

Ken Griffin reveals plans for Citadel’s Miami headquarters (WSJ)

KPMG wins £223mn UK government contract amid plans to cut consultant spending (FT)

Exxon warns of oil shock if suppliers assume demand will fall by 2050 (FT)

UK businesses in the dark over Starmer’s workers’ rights deal (FT)

IBM slashes China research team as it shifts work to other regions (FT)