4th August 2021 – According to PwC’s China M&A 2021 Mid-year Review and Outlook released today, China’s domestic M&A market surged to its highest ever activity levels. Deal volumes increased 11% to 6177 transactions in the first half of 2021, with domestic (intra-China) strategic M&A up by 41% in volume terms while PE and VC investing were also strong. Deal values, which were US$312.1 billion, declined by 29% from their spike in the second half of 2020. returning to more normal levels.
“Driven by strong domestic strategic and PE deal activity, the first quarter of 2021 was very strong in volume terms, but there was some relative slowing in the second quarter with some caution around market uncertainties. Deal values fell in the first half of 2021 due to much fewer one-off state-sponsored and private-sector mega-deals,” said David Brown, PwC Deals Leader for Asia Pacific.
Compared with the second half of 2020, there were much fewer mega-deals (> US$1 billion) in the first half of 2021. There were 45 mega-deals in the first half of 2021, ten fewer than in the previous half-year, many of which were aligned with key domestic economic themes such as industrial upgrade (12 deals, US$ 22 billion), dual-circulation (9 deals, US$ 25 billion), and ESG (5 deals, US$ 16.5 billion).
China’s inward focus upon its domestic economy and rapid rebound from the COVID-19 pandemic, drove domestic strategic M&A volumes to their highest levels since the first half of 2018. Cross-border inbound activities, in contrast, were adversely affected by COVID-19 related travel restrictions. In terms of deal volume, the increase was driven mainly by industrial upgrades, technology and consumer sectors although activities in nearly all sectors witnessed an increase.
PE fund raising activity remained steady with more houses announcing new fund-raisings and a greater proportion of US dollar closings compared to Yuan denominated closings. PE activity remained strong but fell from the record levels hit in the second half of 2020, with fewer mega-deals in the more recent period. Technology, consumer and industrial sectors continued to attract the most capital overall, while the highest volume sectors were again high tech, healthcare, industrial and consumer.
In the first half of 2021, trade sale exits fell back to more normal levels after the spike in the second half of 2020. PE backed IPO activity remained very strong (especially on the domestic Chinese stock markets) as the favoured way for PEs to exit at higher valuations. PE-backed IPO activity continued to be very strong in the first half with the Shanghai STAR market remaining very active.
Outbound M&A remained in the doldrums, negatively affected both by COVID-19 and the geo-political landscape. In volume terms, financial buyers were the biggest players in the outbound space for the first time in history as China-based PEs looked for overseas opportunities with a “China-angle”. SOEs, on the other hand, tended to refocus their attention back to the domestic market. Generally, high technology, industrial and consumer sectors continue to be the most favoured sectors among Chinese buyers.
China M&A is likely to continue to have a domestic theme in the second half, supported by the “Dual Circulation”, “Industrial Upgrade” programmes and State-owned enterprises (SOE) reforms. Many companies continue to revisit their operating models and strategies and will need capital to reconfigure their businesses leading to transactional activity. The PE industry is well placed to respond to the demand for equity capital, the overall liquidity is still high and we expect activity levels to remain strong in the second half of 2021.
“The effects of COVID-19 pandemic and other uncertainties around trade and geo-political relations will continue to impact both domestic and cross-border M&A activity in the second half. We expect some small decline in the second half compared to the first half of 2021, albeit both domestic strategic and PE/VC activity will likely remain robust overall,” said Chris Chan, PwC Mainland China and Hong Kong Financial Services Deals Leader.
