Buyout Billionaire Sees Rising China Risk, Sanctions Over Taiwan

Buyout Billionaire Sees Rising China Risk, Sanctions Over Taiwan
Buyout Billionaire Sees Rising China Risk, Sanctions Over Taiwan

(Bloomberg) — The billionaire co-founder of Swiss private equity giant Partners Group Holding AG said the firm has grown more cautious about China, warning that conflict could ultimately break out over Taiwan.

“We are more careful,” said Urs Wietlisbach, whose $142 billion firm hasn’t done a transaction in the country in about two years. “A Chinese deal today just needs to bring a much higher expected return because you take much more risk.”

Wietlisbach’s assessment speaks to a growing anxiety in the financial industry — that long-simmering geopolitical tensions can flare up with unpredictable speed, endangering the overseas outposts that firms spend decades building. That’s what happened to lenders such as Citigroup Inc., which wasn’t able to extract itself from a subsidiary in Russia before that country invaded Ukraine.

In China, private equity firms are already having trouble unloading some of the assets they’ve acquired. While much of those difficulties stem from a slump in the market and valuations, political strains also weigh on the minds of some would-be bidders.

“It’s not a question of if, it’s a question of when and how,” China will go into Taiwan, said Wietlisbach, who co-founded the firm with Marcel Erni and Alfred Gantner in 1996. If it happens, “one thing is for sure there will be some type of sanctions,” he said.

Chinese President Xi Jinping told an audience of business executives in San Francisco earlier this month that his country wants to be friends with the US and won’t fight a war with anyone. US spy chiefs and the Pentagon assess that Xi wants his military to be capable of overwhelming Taiwan by 2027, while cautioning that they don’t have evidence he currently plans to do so.

Read more: PE Firms Trapped in China After $1.5 Trillion Betting Spree

Still Committed

Partners Group, which has an office in Shanghai, has long been underweight China but is still committed to the market, he said. It’s also looking at Thailand and Vietnam. About 10% to 15% of the firm’s investments are in Asia, according to a spokesperson for the company.

Direct and portfolio exposure to China accounted for 4% of assets under management, according to a presentation last year. China investments include display fixtures maker BCR Group and casual dining group Green Tea Restaurant, as well as an office and retail complex in Beijing.

Deals are run through a centralized investment committee in Zug, an ultra-low-tax Swiss town of around 30,000 people where the firm is based.

Supply chain risk is also a consideration, he said, adding that some firms increasingly want goods produced closer to home, even if they’re more expensive, rather than relying on China.

“We told our companies ‘make sure that you’re not too dependent on China,’” he said in an interview in Singapore. “If you have 40% of your product delivered from China, you have to be careful.”

That shift was prompted by the pandemic, which reduced the supply of goods from the nation, as well as political uncertainty, he said.

A broader economic risk comes from China’s shrinking population, Wietlisbach, 62, said. China, which has traditionally relied on a large labor pool to power growth, is confronting a growing demographic crisis, with its population declining for the first time in six decades last year.

Global Pickup

Despite a recent dip in deals, Wietlisbach said private equity activity globally is picking up this quarter and he expects firms to do more deals next year. Interest rates may top out soon, and many companies are ready to be sold within the portfolios of buyout firms, he said.

“It’s not the best environment, but it’s also not a disaster,” he said, saying the current market is about half as bad as it was after the global financial crisis. “You don’t have huge blow ups, you don’t have debt packages blowing up left and right,” although valuations and multiples have come down substantially, he said.

Lower interest rates would increase stocks as well as private equity valuations, which should lead to more companies being sold, he said. Partners Group’s own shares have rallied 38% this year, showing the less than 1% gain for the benchmark Swiss index.

Still, his expectation for a rebound is dependent on the market not falling apart. Geopolitical tensions have been rising in recent years, pitting China, Russia and others against Europe and the US in what almost amounts to a cold war, he said.

“This definitely has never been as severe as it is today,” he said.

–With assistance from David Scheer.

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