Struggling companies in China are turning to hard times due to a heavy amount of loan defaults, according to an article in the South China Morning Post (SCMP). Some are at a point where they have to dispose of assets to barely stay alive. These are assets that they wouldn’t normally consider selling. Although this is devastating for some businesses, it creates opportunities for potential investors.
These companies want to keep their businesses going, but although they want to sell high the reality of that happening is not practical. This presents investors to swoop in and buy companies for “discount” prices. But, this can cause a dilemma for foreign investors. “Under Chinese law, overseas investors cannot directly buy assets in China. They either have to buy a stake in a company involved in a project, or acquire debt portfolios, mostly from one of the four main managers of distressed assets,” explains SCMP. Although this seems like a hurdle in the global investment community, it can potentially be an informative point of view for future investments in oversea companies.
In China, their rules and regulations when investing in different districts can be different from each other. “Foreign investors should know more about judicial and regulatory rules in different localities. In China, rules regarding distressed asset disposal differ greatly from one place to another. What’s on paper often is not what’s enforced in reality,” explains Feng Jianyun, chairman of Poseidon Capital Group — a Chinese fund that specializes in distressed asset buyout (SCMP).
When investing in a foreign company an “on-ground” team needs to be present. The team needs to understand the different laws and regulations to make sure the deal stays legal. There is a very lucrative opportunity for investing abroad opposed to companies conducting local buy-outs. The price of selling assets to overseas investors is cheaper than a local buyout for these Chinese companies, explains SCMP. But, even though these local businesses want to keep the profits coming, raising the selling price for resident investors may not be the best option right now considering the amount of liquidations currently happening. It’s an open market, but sometimes selling low is the smart option to create opportunity for growth in the future.