I. Overview (SEE PDF FILE OPPOSITE FOR FURTHER CHARTS ON Q2)
Q2 Chinese outbound investments USD 97.9 billion, a decrease of 49% from Q1's all time high of USD 191.6 billion. As shown in Table 1, this is also the lowest amount in the past 5 quarters. While the aggregate amount was down, there were volume increases in all 3 components of our research, indicating smaller average deal sizes throughout each component.
M&A/equity had another outstanding quarter, with USD 49.4 billion aggregate amounts. Virtually all of this difference between quarters was related to the USD 44 billion Sygenta transaction in Q1. Volume continued to rise with 231 transactions announced in Q2, an increase of 11.1% from Q1. This again represents an all time high. There were 12 announced transactions over USD 1 billion, which represented 66% of aggregate amounts. Omitting these 12 transactions from Q2 totals, average transaction size was only USD 146 million - so most of the activity remains very much middle market.
Relative to geography, once again, Europe led in aggregate value (54% of total amounts). North America ranked 2nd in aggregate amounts but led in volume (Europe was 2nd). Relative to industries, Consumer led in volume, followed by Technology, while Technology (due to 4 USD 1+ billion transactions) led in amounts.
While all of these signs show a continued upward trend, we have also seen circa USD 30 billion of terminated, withdrawn or rejected transactions since November 2015, across a number of industries. We discuss these emerging trends in our Quarterly Feature section.
There were 18 Government Related Loan Agreements (up 50% from Q1) representing USD 17.8 billion aggregate amounts (up 11.3% from Q1). This quarter saw the first loans from New Development Bank (NDB) and AIIB. There were four policy bank loans over USD 1 billion, two of these to Russia, one to Ecuador and one to Brazil. Four policy bank loans were signed during State visits.
There were 8 total loans by NDB and AIIB. Collectively, these which represented 44.4% of the volume but only 7% of aggregate amounts. Two of the 4 NDB loans were to BRI countries while all 4 AIIB loans were to BRI countries.
There were 11 multi agreement Government Agreements in Q2 representing USD 30.7 billion (our calculations) aggregate value. Volume increased by 120% while stated aggregate value declined by 67%. However, once removing the two major regional pledges in Q1 (Middle East and Mekong Delta), volume was virtually flat from Q1. Russia and Nigeria received 82% of Q2 pledges.
Signed transactions versus pledges were 19% in Q2. However, MoUs for the Russian transactions of USD 18 billion would raise this percentage to totalling 78%.
M&A / Equity Transactions
As noted above, Q2 announced outbound M&A aggregate value was USD 49.4 billion, down 48% from the USD 95.6 billion in Q1, mainly due to the acquisition of Syngenta by ChemChina, which represented 45% of aggregate amounts in Q1. After removing the pro forma effects of the Syngenta transaction Q2 amounts fell by only 4.3%. Volume increased by 11.1%, to 231 transactions, our highest volume total ever. This quarter there were 12 other transactions of at least USD 1 billion, totalling USD 32.4 billion (66% of the total), while the remaining 219 transactions comprised USD 17.0 billion aggregate value.
Average deal size (excluding equity investments below USD 10 million with disclosed transaction value) decreased from USD 451 million (excluding the Syngenta transaction) to USD 387 million in this quarter. Omitting the 12 largest USD 1+ billion transactions, the average transaction size was only USD 146 million.
Technology led by aggregate value with USD 17.6 billion (36% of the total). This sector recorded 4 transactions above USD 1 billion, including the largest of the quarter – the USD 8.6 billion acquisition of a majority stake in Supercell Oy (Finland) by Tencent Holdings.
Industrials ranked #2 with USD 8.6 billion, representing 17% of aggregate amounts. There were 2 transactions in excess of USD 1 billion including the acquisition of a majority stake in KUKA AG by Midea Group (Germany – USD 4.4 billion).
Financials ranked #3 with 15.3% of total aggregate value. There was 1 transaction above USD 1 billion – the purchase of Dah Sing Life Assurance Co Ltd, Macau Life Insurance Co Ltd, DAH Sing Insurance Services Ltd. by Fujan Thai Hot Investment for USD 1.4 billion. Among Financials there were 19 transactions involving Real Estate.
Consumer ranked 4th in aggregate value with 12%. Collectively, these 4 sectors accounted for 81% of Q2 aggregate amounts.
Relative to volume, Consumer ranked #1 with 54 transactions followed by Technology with 47. Industrials ranked 3rd with 43 transactions, followed by Financials with 39. Together these four sectors accounted for around 80% of total volume.
Europe ranked #1 in aggregate value, accounting for 54%. For the 5th consecutive quarter North America ranked 2nd with 31% while Asia slightly increased from 7% to 9% of aggregate value. Collectively, these three regions represented 94% of Q2 aggregate value.
North America led again in volume with 84 announced transactions/investments (36% of volume), followed by Europe with 75 (32%). Asia ranked #3 with 52 transactions (23% of volume).
This quarter saw the signing of the first loans by two new entrants, NDB and AIIB. These new entrants mark the first steps in China diversifying away from its policy banks of "buy and hold risk" to risk sharing with other countries/partner banks. This quarter such partners included the Asian Development Bank, the World Bank/IMF and the EBRD.
In Q2, there were 18 signed Government Related Loan Agreements; 10 from policy banks, 4 involving NDB and 4 involving AIIB. The aggregate volume for all 3 represent a 50% increase in volume from Q1. Aggregate amounts of USD 17.8 billion; (USD 16.5 policy banks, 0.8 billion NDB and 0.5 billion AIIB) represented an 11.3% increase from Q1.
Six of the 10 policy bank loans were to BRI/OBOR countries, 2 of the 4 NDB loans were to BRI countries while all 4 AIIB loans were to BRI countries.
Average loan size varied considerably via the vehicle:
10 policy bank loans averaged USD 1.65 billion (4 loans over USD 1 billion, including 1 of USD 10 billion
4 NDB loans averaged USD 202 million of NDB exposure
4 AIIB loans averaged USD 127 million of AIIB exposure
While asset/project coverage ratios for the 8 new NDB/AIIB loans seem to be publicly available, we could not readily locate public information on maturities or interest rates for the loans NDB or AIIB loans: organisations which apparently aspire to “transparency”.