Chanel family office eyes China LBO, distressed PE deals

Mousse Partners, family office of the owners of luxury fashion company Chanel, sees private equity opportunities in China’s onshore renminbi market, including leveraged buyout (LBO) and special situation deals.

Noting that LBO financing is becoming more mature and available in the onshore renminbi market, David Yang, head of Asia private equity at Mousse Partners, said there is now opportunity for buyout players to do deals at lower cost within the relatively low-rate environment in China.

“That could generate reasonably attractive returns over the next five-to-eight-year period,” Yang told a panel at the recent Asia Private Equity Forum in Hong Kong.  

The current loan prime rate in China is 3.45%, well below the over-5% levels in the US and other developed markets.

Yang also sees special situations and distressed opportunities in China, especially cash flow-generative assets that offer investors value creation through their direct influence on companies.

Although secondary deals have been active globally, including in Asia, Yang said the wide gap between asking and bidding prices in the Greater China market makes such transactions challenging for investors, save for situations where limited partners (LPs) are in a rush to exit for liquidity.

Yang noted that the secondary market is starting to see larger transactions of over $1 billion in size originating from Asia and around the world.

New York-based Mousse Partners oversees a proprietary global portfolio of alternative investments, with offices in New York, Beijing, Hong Kong, and the Cayman Islands. It is a division of Mousse Investments Limited, whose portfolio includes Chanel Limited.

Chanel is owned by the Wertheimer family, which is among the world’s richest families with a fortune of about $90 billion, according to the Bloomberg Billionaires Index.

DIVERSIFIED PORTFOLIO

In Asia, Mousse Partners likes middle-market buyouts, where the focus is on acquiring small-to-medium-sized private companies with values typically ranging from $50 million to $500 million.

In 2024, Yang said he will be looking at both developed and developing Asia, especially emerging funds that are managed by experienced private equity firms, which have the dry powder to build entry positions in an environment of relatively low valuations.

“Asia remains very important for us globally, especially if we think about it from the medium to longer term,” he said.

“Shorter term, I think there will probably need to be more positive policy moves for the market in general to restore confidence, especially in the public markets,” he added.

The globally diversified portfolio has helped the family office avoid losses from long China and short US or Japan strategies, which caused losses for investors who held bullish views on China’s economic recovery in 2023.

Mousse Partners benefited from some market reversals to generate decent returns last year, Yang said.

Yang joined the family office in June last year from Abu Dhabi Investment Authority, where he oversaw China private equity investments. He is based in Hong Kong.

AVOIDING CROWDS

Mousse has done many buyouts and venture capital investments in Japan, which has performed “very well” over the last few years and remains an interesting market for private investments, according to Yang.

The market isn’t as crowded as China, for example, with potentially more sponsors entering, Yang said.

Buyout transactions under $100 million in enterprise value can be readily achieved in Japan, with an acquisition leveraged six to eight times through regional bank financing, at a lending cost of just 2.5%, he said.

This makes LBOs in Japan an attractive proposition, which leaves owners the room to boost value through restructuring and operational improvements.

Meanwhile, major listed conglomerates in Japan are under pressure from the Tokyo Stock Exchange to enhance return on capital, which will spur mergers and acquisitions and exits for private equity investors, he added.

Although India has emerged as a popular private equity market in Asia, Yang is cautious on over-allocating there as valuations have made the market “very expensive.” This has created a good exit opportunity rather than entering or adding exposure.

“For us, it's more about ‘Keep on going’ in that market,” he said. “India is a market that we've been investing in for the last seven, eight years. It's a very interesting, very attractive market.”

Their interest in India is driven by the country’s large population, consumption and infrastructure upgrades, and tax reform in 2017.

Yang also named Australia as an interesting private market for “classic” LBO deals, which can generate a steady distribution of proceeds.

Noting the US economy’s healthy growth, he said it remains an attractive market for Mousse Partners.