ChinaFIG - Roll-Up Overview and the Chinese Economy

During the 1990’s, the business environment and market conditions, in the US, allowed for billions of dollars to be raised and fund Roll-Up companies. The concept was quite simple in that companies in fragmented industries agree to unite, benefiting from economies of scale, the ability to develop brand awareness and to expand their markets. With the basic premise defined, the group of companies was able to outline the specifics of how they could create value for investors, seek funding from an Initial Public Offering (IPO) and finally join together to form a new corporation.

If we move forward to today, we can see that the proper market conditions and business environment are again present, although not in the US, but in China. Industries throughout China are extremely fragmented and are ripe for consolidation. At the same time, regulatory restrictions in the US are pushing investors to alternative investment markets and exchanges in Hong Kong & Singapore are very attractive for IPO purposes.

Overseas investors are poised to inject funds into new Chinese companies, but the flow of public offerings is not as high as the demand (i.e. Bank of China IPO, thirty times oversubscribed). Part of the reason for this is that many of the larger Chinese companies have either already been targeted by outside investors or are unattractive IPO candidates. Left standing though are countless small to medium size operations, which have strong management and financials, but alone cannot justify a public offering. It is these types companies, which if rolled-up and taken public, can offer substantial growth opportunities.

The capital raised from an IPO can allow a Roll-Up company to invest in talented leadership, who have the vision to transform the individual companies from ‘small players’, into a ‘DOMINANT PLAYER’. The Roll-Up can acquire cutting edge technology, modernize equipment or facilities, streamline production and benefit from economies of scale throughout the operation. It can expand distribution networks, develop brand awareness, unify the sales force, expand to locations throughout China and tap into international markets. Additionally, beyond organic growth, future acquisition of competitors and market leaders can be funded from the IPO with cash or stock.

In the end, not only do outside investors benefit from the new company, but so do the original individual company owners. Whereas they may have struggled for years to self-finance their expansion and risked being driven out of business by larger competitors, they can quickly gain access to capital and avert the dangers from competition. Collectively, the original owners will likely hold more equity in the Roll-Up than all other outside parties and thus will benefit the most from their success. Throughout China, individual company owners in fragmented sectors hold the key to vast amounts of capital and rapid growth potential.

At The China Fortune Investment Group, we have extensive experience in Roll-Ups, taking eight companies public on the New York Stock Exchange. Bringing Chinese companies together to facilitate the IPO process is a main focus of our team and we are on a continuous search for candidates.