Overseas investments high, but success isn't guaranteed

The outlook for investments in China may be uncertain, but Chinese companies' appetite for mergers and acquisitions in developed markets remains at a decade high of 53 deals this year, according to the latest edition of KPMG's High Growth Markets Tracker.

The analysis includes data from completed transactions where a buyer has taken a minimum 5 percent stake in an overseas company.

At the same time, developed markets' acquisitions in China in the first half of 2015 dropped 27 percent from six months ago to a 10-year low of 70 deals.

"The impact and scale of the domestic mergers and acquisitions market on China is often overlooked. Yet, it (this factor) is likely to have an increasing impact on M&As in China as stronger domestic players and, importantly, local private equity firms begin to participate in a more meaningful way in the reforms," said Rupert Chamberlain, partner at KPMG China.

Among the many players, Chinese insurers are most active, especially in making property investments overseas. Two notable transactions in recent years were the purchase of the historic Waldorf Astoria hotel in New York by Anbang Insurance Group Co Ltd for a record $1.95 billion and Ping An Insurance (Group) Company of China Ltd's purchase of Tower Place in London for $520 million, a year after it bought the Lloyd's of London building in 2013.

The New York-based global property market consultancy DTZ/Cushman and Wakefield expects overseas property investments by Chinese insurers will grow to $73 billion by 2019. By 2024, the rapid growth is expected to continue through a combination of increased allocations and a growth in assets under management. This could potentially lead to a further $75 billion of investment, taking overall holdings to $154 billion.

Analysts from DTZ/Cushman and Wakefield said that recent increase in volatility in equity markets worldwide will cause Chinese insurers to accelerate their real estate investment strategy, and overseas markets will diversify away from domestic holdings.

The top 15 Chinese insurers are expected to take the lead in overseas investments, although smaller companies are predicted to follow suit as they grow their teams.

"In recent years, investment activity has increased. This can in part be attributed to the liberalization of foreign investment, which allowed top players to accelerate real estate acquisitions, as well as growth in the value of assets under management," said Nigel Almond, director and head of capital markets research at DTZ/Cushman & Wakefield.

But all these aggressive overseas investments do not necessarily bring success. According to Stephen Maurer, managing director of global market consultancy AlixPartners in Shanghai, China's track record in overseas investments has not been very good. As many as one-third of China's overseas investments have failed.

"Many Chinese executives have limited experience outside of China, and try to run their acquisitions in the Chinese way－relying heavily on interpersonal relationships to get things done. But guanxi (Chinese for relationship) is not the way things typically get done in most international markets. Chinese executives need to adapt their style to international norms," he said.

Chinese companies, particularly State-owned firms, often operate in a relatively protected environment. When Chinese firms invest outside of China, the level of competition and agility required can be much higher, said Maurer.

"Governance in many Chinese companies is not up to international standards, and many of their investments have been in developing countries with equally weak governance systems, creating social, legal, environmental and other issues," he said.

"With the economy slowing, companies, and the Chinese government, may need to focus resources on maintaining domestic growth and stability, for example by exerting pressure on the big Chinese State-owned banks," he said.