6 Ways a China Office Can Help A Lower-Middle-Market PE Firm

Blue Point Capital Partners has a rare distinction among lower middle-market firms. In addition to its three U.S. locations—Cleveland, Seattle and Charlotte, North Carolina—this private equity firm has operated a Shanghai office for the past 14 years.

In 2004, several partners visited Shanghai for a “China 101” fact-finding trip. “I’m guessing about 80 percent of private equity funds did the same thing around that time,” said Chip Chaikin, a Blue Point partner who worked in the Shanghai office from 2004 to 2009. (Most of the firms he refers to probably lacked employees with his background: Chaikin majored in Chinese studies and lived in Asia for five years before joining Blue Point). Within a week, the partners decided a local office could assist small U.S. companies with Asia supply-chain issues and revenue opportunities.

Although labor expenses are rising in China, inherent cost advantages remain, said Blue Point Partner Sean Ward. “The industries that are getting the biggest hit are pure commodity players, and we try to avoid being in pure commodity businesses,” he said. “We’ll definitely keep [the office] there for the long term.”

Here are six reasons Blue Point plans to stay in Shanghai:

1) The Office Maintains a Competitive Edge throughout Asia

The Shanghai location lets Blue Point help portfolio companies not only in China but throughout Asia. That’s important, because more than half of the companies in the firm’s current portfolio have an Asia strategy, Ward said. “We’ve helped start businesses and buy businesses, and we’ve helped them with sourcing in Asia—maybe they were already doing it, but now they’re doing it more efficiently,” he added.

2) It Helps Spot Market Potential for Portfolio Companies

One example is Ohio-based Quality Synthetic Rubber Inc., a former portfolio company that produces rubber components, including automotive silicone seals. When Blue Point invested in 2006, QSR had purchased a building to start a plant in China, and planned to ship the product back to North America. But Blue Point saw a better opportunity in the Chinese automotive market, which was growing rapidly. “We thought if we could get [QSR] ramped up quickly, they would be able to get a large share of the Chinese market,” Chaikin said.

Blue Point helped QSR open its China facility in 2007 and assisted with sales contacts. “We ended up being the largest silicone seal producer for automotive in China,” said Chaikin, noting QSR’s business is still thriving there (Bluepoint exited in 2012). “I think had we not been there, it probably would have ended up being a small workshop that supplied low cost parts to the U.S.,” he said.

3) The China Office Is An Incubator  

Headed by Managing Director Dennis Wu, Blue Point’s China office also has three other employees from the firm, all of whom are Chinese. They aren’t the only workers in the office, because the location also serves as an incubator for portfolio companies that don’t yet have office space in Asia. “It allows the companies to get up to speed faster,” Chaikin said. “They don’t have to set up a legal entity, they don’t have to find physical space, they don’t have to recruit people. We’ll do all that, and they will be employees of our legal entity there, so the companies themselves don’t have to establish one yet,” he said.

4) Blue Point Can Negotiate Better With Suppliers 

When lower middle-market companies have suppliers in Asia, they often don’t have anyone based locally to work with those vendors. That changes when Blue Point invests in a company. Its Shanghai office helps improve supplier negotiations.

“When there is a Chinese national on the ground who can show up at the facility and negotiate in that language, we consistently end up getting better terms,” Ward said. Sometimes that means no longer requiring cash in advance and being sold on credit instead—or it could mean a reduction in minimum-order requirements. “I’m consistently amazed by the ability to improve the terms, by being local,” he added.

5) Business Owners Appreciate Asia Expertise

Some business owners have “Figure out China” on their to-do lists, Chaikin said. “So if they get 10 private equity funds courting them, and only one of them can talk to them about this problem, then suddenly you’re in a totally different space,” he said. “You’re not one of 10 people waving a handful of money at them.”

Said Ward: “There are definitely times when it differentiates us, because of the resources we have that other guys in lower end of middle market do not. It allows us to engage in a dialogue that ends up leading to a deal.”

6) The Office Vets Investment Opportunities

Although the United States typically provides better industry stats than China, “you can sometimes have better conversations on a one-one-one level in China than you can in the U.S.,” Chaikin said. “If we’re doing some industry research for a particular niche, sometimes you can find out more in China that you can in the U.S.”

That means Blue Point can gather industry intelligence to make informed investment decisions. “A “If it is accurate, we will be really aggressive about trying to buy the business.”