By Aaron Back
BEIJING--China's overseas investment surged in the first quarter of this year to $21.4 billion as state-owned companies snapped up resource-related assets around the globe, according to a report by a private investment firm that counts China's sovereign wealth fund among its partners.
China's total overseas investments more than doubled from a year earlier, according to estimates by A Capital, a private-equity firm based in China and Paris that takes stakes in European companies alongside Chinese investors. That figure includes mergers and acquisitions, as well as greenfield investments, or construction of new plants and facilities.
Last year, A Capital identified some emerging trends, such as growing investment by private-sector companies. But investment in the first quarter was dominated by a more traditional pattern of Chinese state-owned companies investing in energy and resources companies in places like South America and Africa.
The report also showed sustained interest in Europe by Chinese companies, a trend that continued from last year, as ongoing sovereign-debt woes on the Continent have created opportunities for investments at depressed valuations.
State-owned companies accounted for 98% of all deal value in the first quarter, a new high and up sharply from 53% in the first quarter of 2011, A Capital estimated in its quarterly Dragon Index on China's outbound investment. Resources and energy deals accounted for 92% of the total, up from just 24% a year earlier.
State-owned firms, which enjoy preferential access to financing from state-controlled banks, may find it easier to make deals amid unstable market conditions. The dominance of state-owned firms in the first-quarter figures "show more difficulties for private firms to seize large opportunities in an environment characterized by both volatility and strong competition for good assets," A Capital said in the report.
South America was the top destination for investment during the first quarter, at 43% of total foreign merger-and-acquisition activity by Chinese companies.
The biggest single investment during the period was the acquisition by China Petrochemical Corp. (600028.SH), or Sinopec, of a 30% stake in Petrogal Brasil, the Brazilian subsidiary of Portuguese oil company Galp Energia SA (GALP.LB), for $5.16 billion. The A Capital report counted the investment as one in Latin America rather than Europe.
Europe was the second-largest destination for investment, accounting for 16% of outbound M&A. That is down from 37% in the year-earlier period, but the decline is largely due to the increased focus on investing in resources.
In the first quarter, Europe accounted for 83% of all non-resource deals. "This confirms Europe's position as a key strategic investment ground for Chinese investors," the report said.
The largest investment in Europe was the 8.7% stake in U.K. utility Thames Water acquired by China Investment Corp. (CIC.YY), the country's sovereign wealth fund. The size of the deal was never disclosed, but A Capital valued it at $779 million.
Two large investments in Europe that have recently been announced weren't included in the index because they haven't yet closed: the acquisition of German manufacturer Putzmeister Holding by Sany Heavy Industry Co. Ltd. (600031.SH) and the acquisition of a 21% stake in Portuguese power supplier EDP-Energias de Portugal SA (EDPFY, EDP.LB) by China Three Gorges Corp.
Investment in the U.S. was just $8 million in the quarter, down from $975 million a year earlier. In a February interview, Andre Loesekrug-Pietri, A Capital's founder and managing director, said political sensitivities are holding back Chinese investment in the U.S., but he expects this may improve after this year's presidential election passes.
A Capital compiles the report from various sources, including official data from China, Europe and the U.S., commercial databases, and its own private research.
In May, A Capital formed a joint investment fund with CIC and Belgian sovereign wealth fund Federal Holding & Investment Co., to invest alongside Chinese firms, primarily in leading European brands and technologies. The size of the fund wasn't disclosed.
A Capital sees investment in European brands as a way for Chinese companies to move up the value chain and improve profitability. In 2010, for instance, it invested alongside Chinese conglomerate Fosun Group, which took a 10% stake in French resort Club Mediterranee SA (CU.FR). Fosun is now partnering with Club Med to open resorts in China.
-Write to Aaron Back at email@example.com.