Further liberalisation of the outbound investment regime is now apparent, particularly around the approvals process, thresholds and timing, which should enhance the prospects of getting deals done. At the end of 2013, the PRC State Council issued the Catalogue of Investment Projects Approved by the Government (2013) (政府核准的投资项目目录 (2013年本)) and the National Development and Reform Commission (NDRC) issued its own Measures for the Administration of the Check and Approval and Record Filing of Outbound Investment Projects (境外投资项目核准和备案管理办法), which came into effect on May 8 2014. A step behind, but also in the process of reforming, is the Ministry of Commerce who has recently circulated a draft of the Administrative Measures for Outbound Investment (Revision) (Consultation Draft) (境外投资管理办法) (修订) (征求意见稿) ) for public comment.

Although these new rules, including the NDRC's Measures for the Administration of the Check and Approval and Record Filing of Outbound Investment Projects (境外投资项目核准和备案管理办法) , which came into effect on May 8 2014, are yet to be fully tested in practice, the new rules collectively entail significant changes for the execution of outbound deals. The bulk of Chinese buyers will benefit from the greater regulatory certainty and efficiency that accompany reduced administrative burdens. As transaction volume and complexity increase, further regulatory initiatives will help raise deal certainty for Chinese investors looking to acquire higher quality, rather than distressed, assets. Despite the steps toward greater administrative efficiency and transparency, PRC regulatory approvals remain one of the key areas of concern for foreign sellers, who we expect to continue with their robust requests to improve deal protection. Mechanisms such as deal deposits, break fees, escrow accounts and other pre-closing security will likely remain important features in outbound deals, particularly those above the new thresholds for which an approval (as opposed to a mere filing) continues to be required. It is important that Chinese buyers engage advisers who are able to communicate with the sell-side in a way that helps the sellers understand the unique processes involved with selling to a Chinese buyer.

Price

The increase in Chinese bidders involved in global M&A has given way to two divergent trends. On one hand, some Chinese pioneers continue to build on their experience and sophistication. These buyers are becoming increasingly savvy in negotiating the right deal terms, including price. Their growing confidence will rapidly bridge the sophistication gap with their western counterparts.

However, new players increasingly struggle with the complexities of unfamiliar markets, meaning Chinese parties will continue to face challenges regarding price, whether their expectations are too low or they have overestimated the benefits of their proposed acquisitions. The impact of and exposure to global markets (including currency markets) in terms of pricing remain a challenge needed to be overcome by adequate risk assessment.

Until greater deal certainty involving Chinese buyers emerges as a concrete trend and Chinese companies develop faster internal processes, many will continue to miss out on auction processes, even when a premium is offered. This will be especially so where key deadlines or criteria in process letters are not met, creating the perception of a disorganised buyer.

Deal availability

Chinese investors are competing for high-quality assets in active markets still recovering from the effects of the Global Financial Crisis, placing them in the same competition as large private equity buyers and Western or other Asian strategic players targeting the same deals. This is more of a concern for Chinese financial investors, such as those in the insurance sector, who are increasingly keen to invest their vast funds in alternative offshore assets like real estate. This has less of an impact on industrial buyers as well as buyers who are prepared to target assets outside overcrowded markets for their potential synergies and are more likely to negotiate bilateral deals.

Responsiveness

In auctions where the sales process is rapid and demanding, it is crucial that the internal teams of Chinese bidders have strong working relationships with their lead external advisors to ensure that enough time is allocated for appropriate sign off from management. This is of particular note for Chinese state owned enterprises which have established internal processes and requirements for undertaking transactions.

Chinese parties are rapidly improving in their knowledge, experience and understanding of process letters and deal timelines. This will also build their responsiveness, adherence to seller expectations and overall deal prospects.

It is therefore critical that Chinese bidders engage reliable advisers, those with real deal expertise and knowledge of the relevant markets. Such factors are more significant than language proficiency. Commercial, accurate and timely advice will continue to save outbound investors.

Outbound destinations

Chinese buyers are expected to continue to target a broader array of markets. While Chinese outbound investment has in the past largely been directed at particular destinations within relatively narrow industrial spheres, this is already changing in line with the increasing maturity and complexity of the domestic markets. Growth in Chinese companies outside the minerals and energy space seeking further outbound opportunities is expected. These are likely to involve less sizable deals and Chinese parties seeking partnerships and joint ventures as opposed to outright acquisitions. Access to cutting-edge technology or a strong R&D capacity will continue to appeal to Chinese deal makers eager to boost domestic efficiency and profitability. Sellers with strong brands will also see interest from Chinese buyers, whose movement away from distressed assets and into higher profile acquisitions will continue. This is evident in the real estate sector with so-called “trophy” assets being sold to Chinese buyers, principally in the US and the UK for the time being. While these may grab headlines, they are applicable to a broad range of sectors (e.g. food, leisure and alternative energy) as China enters a phase of consumption-led and energy efficient growth at home.

Deal structure

With a growing number of markets becoming the focus of Chinese investors, greater emphasis and attention are being placed on deal structuring. Chinese parties will continue to evolve in their appreciation for efficient tax planning, sound exit options and proper investment treaty protection. Like all global companies before them, Chinese investors are increasingly fitting particular investments within broader strategic and commercial goals. This means an increase in the use of offshore special purpose vehicles (SPVs) to secure tax and legal benefits. Chinese regulators are likely to adopt an increasingly supportive stance towards the use of such offshore vehicles.

External regulatory constraints

As Chinese companies increase their understanding of the markets they are operating in, so too will regulators in those jurisdictions develop their understanding of the dynamics of working with Chinese investors. This will have an overall positive effect. Chinese investors need to build relationships with key regulators and ensure adequate and practical disclosures are made to regulators in order to increase the prospects of a positive reception. Politicisation and media sensationalism will remain a feature of high profile deals, particularly those in sensitive sectors. Chinese outbound investors will continue to improve their government and public relations skills or engage advisers who are well-versed in these areas. Success in navigating these issues on sensitive deals will require particularly careful planning and effort on the part of investors.

Notwithstanding the generally positive outlook, increased scrutiny by regulators, particularly antitrust regulators who focus on concentration and the aggregation of state-owned investments, remains a potential obstacle. This includes China's own antitrust authority, the Ministry of Commerce. Intersecting Chinese investments at upstream and downstream levels both at home and abroad will likely complicate these matters.

Political influence

A large number of Chinese outbound investments, particularly those by state-owned players, are still driven by political dynamics between China and the host nation. These bring complexities to deal execution and can affect deal certainty. Chinese investors would be well-advised to not simply rely on bilateral national ties but pay attention to local political nuances. Experienced deal advisors will be able to help foresee the specific roadblocks ahead and structure the deal by striking the right balance between political and economic considerations.

Looking ahead

Chinese outbound investment is still growing in size and volume and is diversifying. A reversal of this trend in the near future is unlikely, barring a major domestic policy reversal. Indeed, increased complexity and sophistication are evident in both the deals being accomplished and their terms. However, as relative newcomers to global M&A, Chinese buyers still lack solid experience in cross-border deal execution and even more so in post-deal integration, which can turn an otherwise sound acquisition sour. Chinese buyers are encouraged to learn from the growing body of experience and, sometimes painful, lessons that are now available.