Private-equity investors, long shut out from getting controlling stakes in Chinese companies, are beginning to find mainland entrepreneurs increasingly amenable to outside help.

These “first-generation entrepreneurs” — people who took advantage of the liberalization of China’s economy starting in the late 1970s — began their operations on a small scale, with modest amounts of capital.

Now, their businesses are bigger, and the owners are coping with slowing economic growth, children that don’t want to take over from them and sprawling companies that require experienced managers.

One example of a company that has turned to private equity is Guizhou Yonghong Food Co., which sold a $50 million stake to Lunar Capital Management Ltd., a buyout-focused firm, in April.

“We haven’t decided what we’ll do in the future… [But] we are getting old,” said Tang Kelin, one of three founders of the beef-jerky producer. “Our children are doing their own thing,” he said, adding that his son, 34 years old, runs an even bigger business in construction and real estate.

Tang, who built up the business with his brother Tang Kexiang and family friend Liu Zhongying, said the business needed not only money to expand but also better managers to run its factories. Yonghong, which began in 1984 with one production shop in the southwestern province of Guizhou, now has around 1,000 employees and four factories.

Forcing the hand of many of these small companies is the country’s slowing growth. Vinit Bhatia, head of China private equity for Bain & Co, said increasing competition in China, where small companies account for a large share of business activity, is also driving some founders into private equity’s arms.

Last year, the amount of money invested in buyout deals rose 22% to $3.1 billion, after declining for the prior three years, according to Bain.

Economic overhauls beginning in the late 1970s after China’s Cultural Revolution increasingly permitted entrepreneurs to start up businesses. By the 1990s, the changes had helped spur a wave of new enterprises that took advantage of low-cost labor and high export demand.

Having grown from mom-and-pop shops to sizable businesses, many of these firms are nearing a stage where they need more expertise in anything from managing their inventory to hiring talent and accounting.

For years, private-equity firms had complained that buying into these companies was difficult. Many entrepreneurs were reluctant to sell because they were still far from retirement age and modest bank loans were enough to allow them to expand their businesses. Huge demand from a rising middle class gave their companies plenty of room to expand. In addition, listing and going public has always been seen as more prestigious than selling to a private-equity company.

In fact, the 28 transactions where private-equity firms got majority control of target companies last year were overshadowed by the 237 deals where they bought minority stakes, according to Dealogic. Until recently, China’s breakneck economic growth meant even minority stakes in growing companies were lucrative for private-equity investors.

“Unlike the U.S, where private-equity investors can buy into many more publicly listed companies, most Chinese entreprenur-founded firms are in private hands, usually under one founder,” said Derek Sulgar, Lunar Capital’s founding partner.

Apart from taking over the beef-jerky business, Lunar also bought a majority stake worth $100 million in Yehoo Apparel Ltd., a Guangzhou-based babywear company founded 18 years ago by Guangzhou entrepreneur Alice Guo.
“CEOs don’t want to give up control because they still view their companies like their babies,” said Huaming Gu, Shanghai-based partner at private-equity firm Baird Capital Partners.

The firm invested in a business in the energy sector last year, where the owner, at 57, wanted a smaller role in managing day-to-day operations. Gu declined to name the company.

Actis Capital is one private-equity firm that has seen an increase in buyout opportunities.

“We have looked at buyout deals in China since 2008, but noticed more and more opportunities in the market last year, ”said Dong Zhong, a Beijing-based partner at Actis.

Actis bought a majority stake worth $51 million in hotpot chain Xiabu Xiabu, which was founded by Kuang-chi Ho, an entrepreneur from Taiwan, in 2008. The firm sold its stake to private-equity firm General Atlantic in December 2012 for an undisclosed amount.