The last decade has seen a dramatic increase in Chinese foreign direct investment (FDI) in the EU and the UK in particular.
Chinese investment in the UK has remained strong since the referendum on membership of the European Union in 2016. In the months that followed, Chinese interest in UK investment opportunities did not falter, fuelled in part by the falling value of sterling. Now, Chinese investors’ interest in the UK remains positive despite Brexit uncertainty.
Many factors ensure the UK remains attractive, including its welcoming environment for international investment, London’s position as a global financial centre, and the availability of talent, know-how and innovation. This is especially true for those whose international strategies may focus on exporting the technologies, products, brands and expertise of UK businesses back to existing businesses in China and Asia, as much as growing those businesses here in UK and European markets.
UK corporate investment opportunities are often competitive with a range of formal and informal auction processes deployed by sellers to maximise value. Differences in culture, working practices and expectations mean some Chinese investors find it difficult to compete with experienced European and North American investors, unless they take steps to clearly explain and differentiate their interest.
Explain the investment rationale
UK businesses will wish to understand the reasons for a Chinese investor’s interest and whether, for example, the investor is seeking a passive financial investment in the UK or wishes to use technology, products or brands in an existing business in Asia. Where the strategy is growth in Asia, it will help to highlight the investor’s expertise and plans early in the process.
PRC approval processes
Many UK businesses are unfamiliar with the People’s Republic of China’s (PRC) approval regime for outbound transactions, which may affect transaction timescales and, ultimately, a Chinese investor’s ability to close successfully. It helps for Chinese investors to educate UK counterparties at an early stage about what PRC approvals may be required, and how this might impact the investment, so there are no misunderstandings.
There may be very different expectations about the length of time a transaction should take to close, the level of diligence required, the negotiation process and the timing and sequence of board, shareholder or regulatory approvals that may be needed. An open discussion about timing and process at an early stage will help avoid different assumptions and expectations.
Especially where negotiations may be handled through a financial adviser or intermediary, it is essential for both sides to devote time to building relationships which create trust and confidence that an investment will be successful.
By engaging in clear and open communications, based on strong relationships, there is every reason to expect Chinese investors will continue to succeed with transactions in the UK.
By Mark Sanders, partner, Reed Smith LLP’s Global Corporate Group, London
©2019 funds global asia