Stephen Aldred

* First time that execs have spun out of a high-profile princeling fund

* Co-founder Yu Jianming to step back from managing partner role, but remain as investor in new funds

Executives at New Horizon Capital, a “princeling” private equity firm founded by the son of China’s former premier Wen Jiabao, are planning to spin out and raise funds of as much as $1 billion, according to three sources who have been approached about potentially backing the fund.

This is the first time that executives from such a high-profile Chinese princeling firm are known to have spun out into a separate fund structure, and comes after a lengthy legal process that saw the firm halt plans for a $1.5 billion fund, originally scheduled to launch in 2014 off the back of a successful investment in Alibaba Group.

Princelings are the sons and daughters of senior government officials in China, and New Horizon, founded in 2005 by Wen Yunsong, also known as Winston Wen, is among the best-known of China’s princeling private equity firms. The firm blazed a trail by raising and investing a series of ever-larger US dollar funds, but its deals drew sharp criticism and accusations of favouritism in China’s blogosphere. Wen officially stepped away from the business in 2009-2010, but has told investors he retains financial interests in the firm, said two of the sources.

The restructuring at New Horizon comes amid an ongoing crackdown on corruption under Xi Jinping’s administration, which has forced officials and their offspring to keep a low profile, and made investors wary of putting money into funds with princeling ties. While investors downplay the changes at New Horizon, they are widely discussed in private equity circles as investors try to gauge political sentiment for princeling firms in China.

“These disputes over partnership structures are common in private equity, and I see nothing unusual about the changes at New Horizon,” said one investor source. “They have good people in the firm who can take over, and Jianming (the firm’s co-founder) is staying involved, so it’s not like a full spinout,” the source added.

As part of the restructuring, investors have been told that Yu Jianming, the firm’s managing partner, who co-founded New Horizon with Wen and who is widely regarded as Wen’s right-hand man, is stepping away from day-to-day operations of the business and “retiring” to Singapore, but he will invest in the fund as a limited partner (LP) and sit on its investor committee.

New Horizon did not respond to questions related to the content of this story.

BULL RUN

Wen and Yu founded New Horizon in 2005, raising a $100 million debut fund with money from backers including Softbank and Singapore sovereign wealth fund Temasek, according to two sources with direct knowledge.

New Horizon’s launch coincided with the start of an I.P.O. bull run in China. GDP was growing at 11.3%, according to World Bank statistics, and authorities that had once viewed private equity firms as capitalist vulture funds were warming to the idea of private equity as a way to distribute capital to start-up companies, to fuel economic growth and long-term stability.

Access to deals, and high profits, attracted more capital for New Horizon from a wider range of investors. The first fund returned over 5 times its money at a time when China funds were typically returning 3 times, said one of the two sources with direct knowledge.

New Horizon raised and deployed a series of dollar funds with increasing speed, tapping investors keen to profit from China’s economic boom. On the strength of its first fund, the firm raised a second fund in 2007 of $500 million, while Fund III raised $750 million in 2009 and Fund IV raised $1.05 billion in 2011, despite a global downturn and increasingly tough fundraising climate.

Investors in New Horizon funds have also included Abu Dhabi Investment Authority, AlpInvest Partners, Deutsche Bank, JPMorgan, Notre Dame Endowment and Vanderbilt University Office of Investments, according to sources with knowledge of the funds.

The firm’s deals and profits — such as an unrealised investment return of 184.5 times from its pre-IPO investment in wind power company Sinovel Wind Group — drew increasing criticism in China’s blogosphere. An $80 million-equivalent pre-IPO investment into Sihuan Pharmaceuticals Holding Group ahead of a Hong Kong listing also attracted media coverage in late 2010, when the deal was overturned by Hong Kong’s securities regulator for violating its rules on timing of investments, and for offering a substantial discount to the IPO price that regular investors would pay.

Hong Kong Exchanges and Clearing subsequently issued an interim guidance note on pre-IPO investments.

Further fuelling the controversy, public documents show that New Horizon still netted a 60% profit from its roughly two-month investment in Sihuan Pharmaceuticals — or around $47 million — under the buyback agreement inserted in the investment documents.

After the Sihuan investment, New Horizon stated that Wen officially stepped away from the business in around 2009-2010 for a role at China Aerospace Science & Technology Corporation. He became chairman of state-owned China Satellite Communications Corp in 2012.

NEW STRUCTURE

Yu Jianming, like Winston Wen, a graduate of Northwestern University’s Kellogg School of Business, is expected to take responsibility for the continued running of New Horizon’s $750 million 2009 Fund III, and its $1.05 billion 2011 Fund IV, one of the first three sources approached on the funds said.

Under the new structure, two new funds, Redview Capital and Advantec will be created, both targeting $350 million, with hard caps at $500 million, meaning they will raise as much as $1 billion, said a second source.

The funds will target core sectors for private equity and venture capital investments in China. Redview will focus on investments in consumer, manufacturing and clean technology sectors, while Advantec will focus on technology and healthcare investments, said the second source.

The current plan is for Yu Jianming to sit on the investor committees (IC) of both funds, and to be a limited partner (LP) in each fund, the source added.

Existing executives at the firm include Jie Zhang, a managing director who has been with the firm since 2006, and Sun Zhuang, another managing director.

 ALIBABA

New Horizon had originally planned to launch a fifth investment fund of up to $1.5 billion in late 2014, the sources said.

However, the fundraising was postponed, as executives at the firm entered a protracted legal process to deal with distribution of profits, ownership and running of existing funds, as well as the structure of the new funds, two of the three sources said.

New Horizon’s fifth fund was originally planned to capitalise on the firm’s investment in Alibaba Group, and was timed for launch immediately after the Chinese tech company’s blowout listing in New York in 2014.

Alibaba Group shares were hotly sought after long before the 2014 IPO listing. Private equity insiders knew that the firm’s dominance of China’s booming ecommerce market offered a potentially huge windfall profit from the planned IPO. They also knew that gaining access to Alibaba shares would show evidence of strong political and business connections in China.

Launching a fund immediately after the Alibaba IPO would encourage new and existing investors to join any new private equity fund.

New Horizon’s investment in Alibaba was made in 2012, when a consortium led by China sovereign wealth fund CIC helped to finance Alibaba’s $7.1 billion buyback of its own shares from Yahoo!.

The deal valued Alibaba at around $38 billion at the time.

Alibaba raised $21.8 billion through a New York listing in September 2014, valuing the firm at $167.6 billion. The company currently has a market value of around $194 billion.

On that market value, New Horizon’s paper profit from Alibaba currently would stand at around 5.1 times its initial investment.

NEW ORDER

Princelings have an established association with private equity investing in China, and the belief that princeling-linked funds have the political connections to gain access to the best deals — like Alibaba — remains attractive to investors, particularly as China’s economic growth stutters, and profits become harder to find.

The 2012 Alibaba deal saw two other firms with princeling co-founders gain access to shares: Boyu Capital and Nepoch Capital.

But Nepoch’s Alibaba investment illustrates both the risks and rewards of an investment strategy tied to princelings.

Nepoch’s co-founder, He Jintao, the son of former politburo member He Guoqiang, was removed in 2014 from the documents that Nepoch shows its investors, after he was detained in connection with an anti-corruption case against Song Lin, the former chairman of state-run conglomerate China Resources, two sources close to the situation said.

Nepoch had invested $100 million in the Alibaba deal in 2012, with $40 million of that total coming from co-investors Siguler Guff, JPMorgan and Neuberger Bermann, who were early investors in the fund, the sources said.

As part of the deal, the co-investors paid none of the usual management fees or carried interest to Nepoch on their investments, increasing their profits, said the sources.

Funds of Siguler Guff — Siguler Guff BRIC Opportunities Fund III, LP and Siguler Guff HP China Opportunities Fund, LP — were listed in Alibaba’s IPO prospectus as selling a total of 483,872 shares, or 50% of their holdings at the IPO.

Siguler Guff declined to comment. Neuberger Bermann and JPMorgan did not respond to requests for comment.

Nepoch eventually raised $300 million out of an initial target fund of $500 million, said the two sources close.

“The fund is already in profit for the co-investors, based on that one investment,” said one investor in the fund.

It is not clear, though, if Nepoch will be able to raise a second investment fund from investors.

by Stephen Aldred

The following article was published on Debtwire on May 27, 2015

When CVC Capital Partners struck a deal to buy a majority stake in serviced office company The Executive Centre from Headland Capital Partners in May 2014, the London-headquartered firm did not know that the EBITDA had been overstated by as much as around USD 8m, according to three sources close to the deal.

After the overstatement was confirmed by a forensic investigation of the accounts, Headland, the former private equity unit of HSBC in Asia, bought back a large portion of the stake in The Executive Centre that it had sold to CVC, the first and second sources close and a fourth source close to the deal said.

The overstated EBITDA, at a company owned by a well-regarded private equity firm, and uncovered after the stake was sold, shows the risks that even seasoned investors like CVC continue to face when investing in Asia. The Executive Centre is the latest in a series of companies in Asia in recent years where blue-chip names, including Bain Capital and Carlyle Group, have seen investee companies caught up in accounting scandals.The risks can be almost impossible to detect during a normal acquisition due diligence, as The Executive Centre case shows, the first three sources close said.

CVC paid around USD 196m-USD 240m, backed by a USD 115m debt facility, to buy a majority stake in The Executive Centre in 2014, as Debtwire reported. The debt was resized based on the revised earnings, and ended up at around USD 60m-USD 72m, said two of the four sources close to the deal.

After CVC confirmed that EBITDA at its new investment had been overstated, Headland agreed to buy back the bulk of its original stake. Headland remains the largest shareholder in The Executive Centre with a stake of around 80%, while CVC holds around 15% and management holds the rest, the first two sources close said.

CVC had originally acquired around 71% of The Executive Centre, the third source close and a fifth source close to the deal said.

Headland has raised private equity funds of USD 2.9bn, according to its website. It is currently raising a new fund of around USD 1bn, but is having to raise that fund without the support of former cornerstone investor HSBC, a source close to the fundraising said.

While CVC executives were cleared of any oversight, Headland has responsibility for audit processes at the firm where it was the majority shareholder, the first two sources close said.

CVC, Headland and The Executive Centre declined to comment on the contents of this report.

Forensic

A forensic investigation, conducted by KPMG, cleared CVC executives of any oversight related to the investment in The Executive Centre, the first two sources close to the deal said. The KPMG investigation, conducted over several months, revealed that the overstatement of earnings had been too well hidden to discover in the course of a normal due diligence, the first three sources said.

Wages and costs in the firm’s accounts had been understated, leading to an increase in EBITDA. Auditor reports which stated concerns about cash flow had also been altered — the auditor’s concerns were altered or removed from documents before they reached the CEO’s desk and the board of directors, the KPMG investigation discovered, the first three sources close to the deal said.

The forensic assessment showed no cash had been pulled out of the company, the first and second sources close to the deal said.

The alterations had been made to the consolidated accounts at the headquarters level, the second source close said. “The numbers at the various regional centres of the company were all fine,” the source said.

KPMG declined to comment on the forensic investigation at The Executive Centre.

The USD 115m loan package, underwritten by HSBC and Babson Capital, was based on an EBITDA of around USD 28m-USD 30m, Debtwire reported at the time of the initial investment. The revised loan facility of around USD 60m-USD 72m was based on a restated EBITDA of around USD 20m-USD 24m, the first source close said.

HSBC had underwritten a USD 75m amortizing tranche that paid a margin of Libor+ 450bps with an average life of around 3.5 years, while Babson Capital underwrote a 5.5-year USD 40m bullet “institutional” tranche paying L+ 475bps. Leverage for the original transaction was 2.5x-3x, as reported.

Lenders which had committed to the original financing — ANZ Bank, Sumitomo Trust and Banking, Sumitomo Mitsui Banking and CDIB Capital — were bought out of the financing, the first source and a sixth source close to the deal said.

Around USD 40m came in, of which about USD 7m went to pay lawyers and accountants fees, while USD 33m was paid to the banks for drawn portions of the facility, according to the third source close to the deal.

Eating earnings

The Executive Centre case follows from troubles at another CVC asset in China, the high-end restaurant chain South Beauty, where CVC is now engaged in a legal dispute with the founder, Zhang Lan, as the private equity firm attempts to recover its USD 300m investment in the firm, as Debtwire reported.

The alleged overstated earnings at South Beauty were more obvious, the first three sources close said, and led directly to CVC senior managing director Sunny Sun losing her job, as reported.

Earnings at South Beauty were alleged to have been kept inflated, at least in part, by company employees paying for fictional take-out meals on credit cards, two sources close to the South Beauty situation said.

South Beauty did not respond to requests by phone and email to comment on the allegations. CVC declined to comment.

Bankers had questioned the company’s stable earnings at a time when listed rivals were already issuing profit warnings, as an anti-corruption campaign initiated by China’s paramount leader Xi Jinping began to eat into their revenues, as reported.

On 12 July 2013, Hong Kong-listed Xiao Nan Guo, a rival Chinese restaurant company, warned that it expected a “significant decline” in its unaudited net profit for the six months ended 30 June, 2013, “triggered by the government policy of restrictions on entertainment and hospitality; the impact of avian flu; and the continuous slower growth of the macro-economy”.

The bank group that backed CVC’s acquisition of an eventual 82.7% stake in South Beauty with a USD 140m leveraged buyout loan, in early 2014, has appointed Borelli Walsh and Kirkland & Ellis as financial adviser and legal counsel in its negotiations, as reported.

The consortium, which includes original lead underwriter Bank of America Merrill Lynch, Credit Agricole, Korea Exchange Bank, Babson Capital, Natixis and Entie Commercial Bank, is now being approached by buyers interested in buying their portions of the LBO financing, a third and fourth source close to the South Beauty situation said.

“Hedge funds and investment banks call and ask if we want to sell, and at what price. I tell them, ‘We don’t have a price, we don’t have visibility on the revenues. You tell me the price, how would you price it?’” the third source close to the South Beauty situation said.

CVC, through its acquisition vehicle La Dolce Vita Fine Dining, has obtained a Mareva injunction, via the Hong Kong High Court, to freeze assets of South Beauty founder Zhang Lan, as well as Grand Lan Holdings Group (BVI) and South Beauty Development, as reported.

Headland

Headland acquired its stake in The Executive Centre in December 2009, when it was still HSBC Private Equity Asia (HPEA). In 2010, senior managers at HPEA acquired 80.1% of the firm, and the fund spun out of the bank, as did many other private equity firms globally, in the wake of new rules after the global financial crisis that increased the cost of capital for banks retaining private equity assets.

HSBC was a cornerstone backer of Headland Private Equity Fund 6, which raised USD 1.34bn in 2008, investing “several hundred million dollars” in the fund, a source close to the fundraising said. The bank had a 19.9% stake in Headland after the 2010 management buyout, according to information on the Headland website.

Irony

Despite the previous issue, The Executive Centre has performed well of late with revenue and EBITDA now above the level of the overstated accounts at the time of the initial CVC investment, according to three of the first five sources close to The Executive Centre deal.

The company’s earnings have been boosted by demand for serviced office space around Asia, the same three sources added.

The company, which has been in business for 20 years and which has serviced offices in locations throughout Asia-Pacific, is planning a Hong Kong IPO, according to recent media reports, which could give a profitable exit channel to both of its private equity investors.

by Stephen Aldred, Jou Yu and Luc Mongeon

The following article was published on Debtwire on May 28, 2015

Bank of China is sounding lenders in Asia and Europe to join an underwritten seven-year term loan and revolving credit facility of around USD 1.95bn to back the acquisition of a majority of Royal Philips’ LED components and automotive lighting business, Lumileds, by China-based investment fund GO Scale Capital, five sources familiar with the deal said.

The loan, which uses a structure similar to a Term Loan B, comprises a USD 1.6bn term loan, of which BOC will hold up to as much as USD 800m, and a USD 350m revolving credit, which BOC is expected to hold and not syndicate, the sources said.

The Chinese bank is tapping the loan markets in Europe, and offering a margin of LIBOR+ 330bps and a front-end fee of 100bps for a take of USD 100m, giving an all-in of around L+ 364bps, two of the sources familiar said.

The seven-year loan repays in quarterly instalments of 0.25% of the outstanding principal, giving an average life close to seven years, one of the sources familiar added.

Philips announced that it had agreed a deal to sell an 80.1% stake in the combined LED components and automotive lighting businesses to a consortium led by GO Scale Capital, with Philips retaining the remaining 19.9%, on March 31. The deal values the business at an enterprise value of USD 3.3bn, according to the statement.

The Lumileds loan is the latest in a series of deals where Chinese banks have underwritten financings to back overseas acquisitions by Chinese buyers, or to back going private deals for overseas listed Chinese companies. The deals have been dubbed “patriotic lending” by Western bankers in Asia, who are losing out on lending opportunities.

Morgan Stanley originally had a mandate to arrange a Term Loan B financing for the buyout of Lumileds, two of the sources familiar, and a source close to the situation said. Earlier this month, BofA Merrill Lynch was bumped off a financing that would have backed the USD 1.9bn buyout of US listed OmiVision Technologies by Hua Capital Management, CITIC Capital and Goldstone Investment, as Debtwire reported.

Bank of China and China Merchants Bank are providing a financing package of around USD 800m for the OmniVision deal, split between a term loan of above USD 500m and a bridge facility. The decision to go with Chinese banks for the buyout was based on pricing, and a hard commitment from BOC to underwrite the deal, Debtwire reported at the time.

The OmniVision deal followed the buyout of US-listed online games developer, Perfect World, which was backed by a USD 900m loan from China Merchants Bank and Wing Lung Bank, as reported.

The OmniVision buyout was agreed with a consortium of well-known Chinese sponsors with a track record of doing overseas buyouts, including blue-chip firm CITIC Capital, but GO Scale Capital is a little known investment fund, sponsored by two venture capital firms, GSR Ventures and Oak Investment Partners. The consortium partners for the Lumileds buyout are Asia Pacific Resource Development, Nanchung Industrial Group, and GSR Capital, said the the March statement announcing the investment.

The Lumileds acquisition is expected to tap into the Chinese government’s demand for environmentally friendly technology, including increased use of electric cars.
 GO Scale has previously invested in Boston-Power, a maker of electric vehicle technologies. Boston-Power secured USD 290m in local government financial support to expand its two facilities in Liyang and Tianjin in China, according to a company statement on December 22, 2014.

The company announced on May 4 that it had an exclusive agreement with Shandong Xindayang Electric Vehicle Co to supply battery packs for its ZD low speed electric vehicles (LSEV). Boston-Power will build an electric vehicle battery pack assembly plant in northwest China in Lanzhou which will be able to supply 40,000 packs per year for Xindayang’s Eco-EV business, the May statement said.

by Stephen Aldred

The following article appeared on Debtwire on May 6, 2015

Bank of America Merrill Lynch has been bumped off a major-buyout-financing by Bank of China and China Merchants Bank, which swooped in to back the buyout of US-listed OmniVision Technologies with a term loan at the last minute, in the latest instance of what is being dubbed “patriotic lending” by Western bankers in Asia, according to three sources close to the situation.

The USD 1.9bn going private deal for OmniVision, announced on April 30, was backed by a financing package of around USD 800m from the two Chinese banks, split between a term loan of above USD 500m and a bridge loan facility, one of the sources said.

Bank of America Merrill Lynch is the M&A advisor for the consortium buying OmniVision, which makes camera image sensors, and was arranging banks to back the buyout before the late-stage deal saw BOC come in as mandated lead arranger and sole bookrunner, and China Merchants as lead arranger, the same source said.

A consortium of Beijing-based Hua Capital Management, CITIC Capital and Goldstone Investment, a subsidiary of CITIC Securities, struck the deal to buy OmniVision for USD 1.9bn. The decision to use capital from BOC and China Merchants was straightforward, said a source in the sponsor consortium.

“It was based on pricing and commitment. BOC made a hard commitment and will syndicate later. The foreign banks need time to build a syndicate first. Not much of a decision,” the source said.

BAML is a balance sheet bank, meaning it would price and hold a portion of a loan based on its perception of the risk involved. But it would not hold the bulk of a deal to buy OmniVision, and would syndicate its risk out to other banks, pricing the cost of a selldown into the deal, said the first source.

“If BOC and China Merchants are not going to sell a large chunk of the deal into the market, just a small portion to like-minded banks, they can ignore the 2.25 or 2.5 points paid to participants that would add to overall costs in pricing a deal,” said the first source.

The OmniVision deal follows the buyout of US listed online games developer, Perfect World, which was backed by a USD 900m loan from  China Merchants Bank and Wing Lung Bank.

Large buyouts of US listed Chinese firms like Focus Media, taken private for USD 3.7bn in 2013, have featured Chinese banks as lenders, but not previously in such substantial roles.

Chinese banks take a different view of the risk of holding a large portion of a buyout loan for a firm like OmniVision, said a senior Chinese banker, noting that their offshore USD funding costs are not cheap, at around 3% to 4%.

“They will be more familiar with the credit, and the onshore risks with these companies, and they take a different view of the long-term relationship they will build with the company,” said the source.

“USD 1bn-USD 2bn is small for these banks, when you consider they are used to lending USD 10bn to an SOE. Their cost of funding in USD is not cheap, but if they see an opportunity, they will match or undercut a Western rival,” the source added.
Relationships with the Chinese private equity firms involved in the buyout, which include blue chip name CITIC Capital, would also factor into Chinese banks’ behaviour, the source said.

Beijing based Hua Capital’s president, Steven Zhang, is a former partner at WestSummit Capital, a China-based private equity firm specializing in overseas buyouts, which is backed by sovereign wealth fund China Investment Corporation (CIC), according to S&P CapitalIQ data.

CITIC Capital, a buyouts unit owned by owned by giant Chinese conglomerate CITIC Group, Tencent Holdings, CIC, and Qatar Holding LLC, has around USD 4.6bn in capital under management, and a long history of buying companies overseas, including Asia-Info Linkage. Goldstone Investment is a subsidiary of CITIC Securities, and an established direct equity investor in China.

While BAML and other Western banks are tallying losses from the Perfect World and OmniVision deals, foreign sponsors are not yet tapping Chinese banks as lead underwriters on buyouts.

“We haven’t seen international sponsors going with Chinese banks yet. Part of it is, they’ve done business with Western banks before, and know what to expect if they run into problems, and maybe need a covenants waiver down the line. With Chinese banks, we don’t know how that would play out,” said the third source.

by Stephen Aldred

The following article was published on Debtwire on February 2, 2015

CDH Investments, one of China’s biggest private equity firms, has been forced to repay a USD 500m loan backed by its shares in Hong Kong-listed pork products company WH Group after the stock price plunged on poor earnings and triggered a margin call, three sources close to the matter said.

Like many private equity firms in emerging Asian markets, CDH is under pressure to return money to investors and use the loan to pay profits out from its WH Group investment. But it was the investors that ended up paying back the loan, plus a penalty of 12 months interest, the three sources said.

The additional cost to investors was around USD 25.6m for the interest cost and fees on the loan, according to Debtwire calculations.

“I don’t think CDH will do a loan like this again for a long time. It was embarrassing for them and angered some of the investors. Besides, the financial benefit of these loans is marginal in terms of fund returns,” a fourth source close to the firm’s strategy said.

Share-backed loans are a niche product provided by specialist teams at investment banks. While they have been used by private equity firms before in Asia, three separate bank sources said they are seeing rising demand for the product, which sponsors see as a way to get profits back to investors while shares in listed companies are still locked up.

The failed loan adds to CDH’s woes after a botched initial IPO for the world’s biggest meat processor, where media revelations about a USD 600m payment to WH Group executives and the hiring of 29 bookrunners led to the offering being cancelled. CDH had put up nearly USD 660m of shares in that IPO, but sold nothing in the eventual listing.

The firm, which holds around 30% of WH Group, has a one-year lock on its shares.

Drive for profit

CDH’s early successes in China have seen it raise over USD 7bn from investors including California Public Employees’ Retirement System and Canada Pension Plan Investment Board. But recent funds have not matched earlier performances, and CDH has been on a drive to get more money back to its investors.

After failing to sell any of its stock at the WH Group IPO, CDH agreed the USD 500m share-backed loan, arranged by Goldman Sachs, Morgan Stanley and UBS, with JPMorgan as the lender, according to a term sheet seen by Debtwire.

WH Group announced on October 16 that seven borrowers, all funds of CDH, had pledged 14.13% of the company’s total shares on issue to a commercial loan on October 14, without providing further details.

While details of the loan were undisclosed in the October announcement, news of its existence, combined with poor third-quarter sales of packaged meat products in China for Henan Shuanghui, which is 73% controlled by WH Group, sent the company’s stock into a slide.

WH Group does not have a blue-chip cornerstone investor following its initial problems with the IPO, and its stock is widely held by hedge fund investors, increasing trading volatility, the fourth source close to the matter said.

“CDH’s internal perception of WH is different than the public perception, and that is part of the problem. They see this as their best asset, so they didn’t realise how the market might react to news of the loan, and the consequence of putting it in place so close to earnings, which they missed,” the fourth source said.

WH Group shares fell 37.6% from HKD 6.09 a share on October 14 to a low of HKD 3.80 per share on December 17, according to Bloomberg data. The loan agreement features a first margin call if shares fall below 30%, then a second margin call if they fall a further 25%.

CDH paid back the loan around the third week of January, the fourth source said, adding that the loan had been distributed to investors, but CDH had to issue a capital call from its funds to repay the deal.

“Investors are upset about the loan, but I think they’re more upset about the stock price,” one of the three sources close to the situation said.

WH Group shares closed at HKD 4.40 on 30 January, 29% below the HKD 6.20 listing price.

CDH, Morgan Stanley and UBS declined to comment.

Goldman Sachs and JPMorgan did not respond to requests for comment.

Under pressure

CDH invested in the same asset from four separate funds, starting with a 2006 investment from its second buyout fund into China’s Shuanghui Group. The investment with Goldman Sachs of CNY 2.6bn (around USD 256m at the time) was one of the first foreign investments into a state-owned enterprise. Subsequent investors included New Horizon Capital and Singapore sovereign fund Temasek; CDH has continued to invest through successive funds.

Shuanghui made headlines when it agreed to buy Smithfield Foods in the US for USD 5.3bn, a deal which ranked as the single biggest acquisition of a US company by a Chinese buyer. At the time the deal with Smithfield was completed, WH Group was valued at USD 7.4bn, according to Asia Private Equity Review.

“If you’re an investor in CDH’s fund two, it’s a bang-out return. Fund three is still good, but fund four is so-so, and fund five — it’s average, a pre-IPO investment and it’s probably returning about 0.7 right now,” one of the sources said.

CDH should eventually make a handsome profit from its pork investment, but the WH Group investment mirrors a common problem for private equity in Asia’s emerging markets, where fickle capital markets and minority stake investments make it tough to exit deals.

New data released by PwC last week shows that 2014 was a banner year for new China-related private equity investments, with M&A volumes up 51% to around USD 80bn from 593 deals, and average deal values more than double at USD 792m. There were more than 15 deals over USD 1bn in value, and outbound PE-backed M&A deal volume almost doubled, PwC said.

But the same data also reveals the extent of the deal overhang in China: private equity and venture capital firms made 1,927 investments in 2014, but just 232 exits.

The lack of liquidity from Asia is ratcheting up tensions between firms and their investors, pushing sponsors to seek novel ways to get money back to their LPs.

Loan details

CDH’s USD 500m two-year loan was priced at 3-or-6-month LIBOR+ 350bps, repayable quarterly, with a front-end fee of 1% of the final loan amount, or USD 5m.

Planned participants in the term sheet seen by Debtwire were CDH Shine, CDH Shine II, CDH Shine III, CDH Shine IV, CDH Shine V, CDH V Sunshine I and CDH V Sunshine II, the same seven units that were listed in WH Group’s October 14 announcement.

Collateral shares in the term sheet were 1,989,906,471 shares, based on a base share price equal to 13.3% of issued shares in WH Group, or 44.6% of CDH shares, although figures were subject to change based on the final set base share price.

The loan to value ratio was 35%.

The loan featured a first margin call if the share price was 30% below the base share price, and a subsequent margin call if the share price was 25% below the share price from the previous margin call. Terms also included a hard trigger if the closing share price was 50% of the base share price.

Terms also included change of control and material adverse change clauses.

The borrower can prepay the loan in whole or in part, but if the pre-payment happens within the first 12 months, the borrower still needs to pay the interest up to the first 12 months, the term sheet reveals.

by Stephen Aldred

The following story was first published on Debtwire on January 9, 2015

Asian private equity firm RRJ Capital, founded by ex Goldman Sachs and Hopu Investments dealmaker Richard Ong, has begun fundraising for a third buyout fund of at least USD 4bn, according to two sources familiar.

The planned fund underscores the rise of home-grown Asian firms, whose ranks include Affinity Equity Partners, Baring Private Equity Asia, PAG and Hopu Investment Management, and the more successful local dealmakers are now matching their global rivals in terms of fund sizes.

RRJ declined to comment on its fundraising plans.

RRJ’s third fund will also add to a record store of dry powder in Asia for private equity investments, which Bain & Co estimated last year at USD 138bn, and which is leading to increasing competition for deals. Adding to that store of uninvested capital, a series of further funds closed last year with a focus on Asia deals, including TPG Capital (USD 3.3bn), CVC Capital (USD 3.5bn), Carlyle Group (USD 3.9bn), Morgan Stanley Private Equity Asia (USD 1.7bn) and Affinity (USD 3.8bn).

A fund of USD 4bn would bring RRJ’s total capital raised to around USD 10bn in just four years, putting it on a par with rivals such as Affinity Equity Partners, which has been investing in Asia since 2004. It also comes just a couple of years after RRJ closed its last buyout fund, which at USD 3.58bn was the largest raised by an Asian firm at that time.

Ong became famed for a rapid-fire style of investing at Hopu, a USD 2.5bn fund established in Beijing in 2008, where he teamed up with China rainmaker Feng Fenglei. He has continued the pattern with his own vehicle, RRJ.

RRJ’s hybrid style, adapted to the Asia markets and often bearing resemblance to a hedge fund investor, has seen the firm largely steer away from borrowing debt for buyouts of whole companies, the traditional private equity style in the West, in favour of investments in pre-IPO deals and minority stakes in companies or joint ventures, usually followed by a swift exit.
Malaysia-born Ong brought his brother Charles, a former senior Temasek executive, into RRJ in 2011.

Temasek is an LP in RRJ, and the firm has completed co-investments alongside the Singapore sovereign fund, including buying USD 90m of Olam International bonds along with warrants for the company’s shares in 2013, when the Singapore commodities supplier was under attack from shortseller Carson Block.

The Ong brothers’ deals range from the USD 3.5bn LBO of hydraulic fracturing company Frac Tech International, to a USD 326m investment in ING Groep’s US insurance unit, and a stake in AAB China, a diaper maker. More recently it established a USD 300m joint venture with Jollibee Foods Corporation of the Philippines to expand coffee chain Dunkin’ Donuts into China, looking to tap growth in the world’s second largest economy.

Ong’s ability to return capital appeals to limited partners (LPs) that have been disappointed by returns made on many of their private equity investments, and the lack of liquidity from the funds they have seeded in the region.

RRJ’s first USD 2.3bn fund, closed in 2012, has already returned 85 cents on the dollar, while its second fund, closed in 2013, is returning 25 cents on the dollar, one of the sources said. The funds are generating IRRs of 21% to 25%, the same source said.

As a result, the firm already has around USD 3bn in “soft commitments”, and expects to wrap up the fundraise by around July. Globally, private equity funds that closed in 2014 took an average of 16 months, according to data released this month from Preqin.

by Stephen Aldred

According to media reports, anti-democracy types in Hong Kong hope to take pro-democracy campaign organisers to court to make them pay their taxi bills.

No, I’m not making this up.

The idea of the lawsuits is that demonstrations – now in their third month – have made cab journeys longer, and as a result have pushed up the cost of a ride. Therefore, the argument goes, organisers of pro-democracy demonstrations should foot the taxi bills of anti-democracy types.

Unfortunately, there’s a rather large flaw in this argument. If you know there’s a demonstration blocking the road which will lead to you paying a hefty taxi bill, then that’s the choice you make in taking a cab. Caveat emptor.

The argument loses even more ground when you consider that you can easily take the subway to get past the demonstrations — and generally there’s a station within walking distance of you in Hong Kong.

And there are still other alternatives.

You could stroll through the demonstrations and amuse yourself by taking in the flourishing body of artwork that so eloquently speaks on behalf of Hong Kong’s wit and creativity.

And even if creative art works that use humour to propose a more egalitarian city are not your thing, then you can simply walk around the demonstration sites. It takes literally ten minutes.

And because there are no cabs, you’ll be breathing clean air, a byproduct of the demonstrations that comes free of charge.

• Stake sale could value Focus Media at around $9 bln – sources
• Focus Media mulls dividend recap of over $1 bln – sources

HONG KONG, Fri, Dec 6, 2014 – Carlyle Group-backed display advertising firm Focus Media Holding Ltd is mulling a stake sale of up to $900 million, to pay down debt ahead of a possible listing in China, according to two sources with direct knowledge of the matter.

The sale of a 10 percent stake would value Shanghai-based Focus Media at between $8 billion and $9 billion, more than double the price a Carlyle-led consortium paid for the firm in 2013.

Discussions are at an exploratory stage and may not proceed. The company was earlier reported as planning a $1 billion Hong Kong IPO in early 2015, and the sources said that Hong Kong remains the preferred listing destination.

Focus Media is also considering a dividend recap of over $1 billion, as the company’s owners look to take profits from an asset which has seen EBITDA grow by nearly 30 percent a year for the past two years, the sources said.

The Carlyle led consortium, which included CITIC Capital Partners, China Everbright, FountainVest Partners and Fosun International Ltd, bought the company for $3.7 billion and delisted it from the Nasdaq in 2013.

A $500 million recap was completed in 2013, the first reported deal of its kind for a Chinese company owned by foreign private equity firms. That debt has largely been paid down, and the company’s EBITDA of around $580 million a year is now more than its net debt, the sources said.

STAKE

The discussions around the potential stake sale come with plans for a Hong Kong listing still on hold, pending a U.S. Securities and Exchange Commission (SEC) investigation into possible securities fraud, which Focus Media announced in a statement early in 2013.

That investigation followed 2011 allegations of fraud against the company made by shortseller Muddy Waters.

However, the sources said a settlement with the SEC is expected soon, and could be for around $20 million. Since a final date for any settlement is not known, owners of Focus Media have been discussing ways to take profits out of their asset, including the sale of a stake to pay down debt ahead of a China listing, and a possible second recap.

Potential buyers for the stake would likely include local Chinese firms, one of the sources said, such as Chinese insurers and fund managers who heavily backed the sale of a $17.5 billion stake in Sinopec’s retail arm earlier this year.

As the company has paid down much of its previous debt, a recap deal of as much as 2 or 3 times EBITDA, equivalent to around $1.16 billion to $1.74 billion, is also possible, and could be used to pay dividends out to the company’s owners.

Carlyle and the SEC declined to comment. Focus Media did not respond to requests for comment. Sources could not be named, as details of the discussions were not public.

The 2013 deal to buy Focus Media is the biggest ever leveraged buyout of a Chinese company, and was backed by a $1.525 billion debt package.

Focus Media is among a slew of “China orphans” expected to relist in Hong Kong and China over the next few years.

“China orphans” is a phrase used by bankers and private equity execs to describe firms previously listed in the U.S. or Singapore, but which received little attention and were delisted in the hopes of achieving a better valuation closer to their home markets, where investors are more familiar with their business models.

Those hopes have been boosted this year by the performance of private equity backed China pharmaceuticals company Luye Pharma Group Ltd, which has seen its stock price rise over 60 percent since its Hong Kong debut in July. Luye Pharma was previously listed in Singapore.

Boyu Capital is regarded as among the most professional operators in China private equity, with seasoned executives at its helm. But according to multiple investors, Alibaba and Cinda are not only what lures them to Boyu.

Investors were also impressed with Boyu’s 2011 purchase of a controlling stake in Sunrise Duty Free – which runs all the duty-free stores at Shanghai and Beijing’s international airports. That deal, they believe, provided evidence that Jiang Zemin’s grandson could gain access to a strictly controlled state sector and convert those assets into a highly profitable investment.  Read full story

This story appeared on Reuters on October 21, 2015

China private equity firm Nepoch Capital has erased its princeling backer He Jintao from the documents it shows investors after he was questioned in connection with a corruption investigation, sources have told Reuters.

Nepoch’s distancing from its co-founder, son of former head of Communist Party discipline He Guoqiang, was a direct result of his being questioned earlier in May, said one of the sources, an investor in the fund.

A source close to He said the case was linked to investigations into Song Lin, the former chairman of state-run conglomerate China Resources, which has been accused of over-paying for assets.

There has been no indication that He has been or will be charged with any offense.

A source from an international bank that is considering an investment in a dairy farm with Nepoch said underwriters for that deal had shown it legal documents to prove He was no longer involved with the firm.

He said the bank’s own internal due diligence procedures would otherwise have barred it from investing alongside Nepoch.
Nepoch did not respond to requests for comment, while He could not be reached.

President Xi Jinping’s drive to rid China of endemic corruption has felled a number of high-profile figures, including former security chief Zhou Yongkang and scores of family members who stand accused of using his political clout for financial gain.

In the private equity industry, which has a long association with China’s so called princelings – the sons and daughters of the country’s elite – political connections and private gain have often gone hand in hand, which has proved a draw to investors.

Sources with knowledge of the matter have told Reuters that Nepoch’s political connections were openly touted during its debut fundraising, and investors said the value of those links was demonstrated when it managed in 2012 to find its way as an investor in Alibaba Group Holdings, which last month pulled off the largest IPO in history.

“That deal showed us they really had the connections to land deals, and convinced us to invest in the fund,” said the investor source.

Fifteen PE firms identified by Reuters that were either founded by a princeling or had princelings in senior roles raised at least $17.5 billion since 1999.

Though Nepoch has made a handsome profit from its Alibaba holding – more than four times its investment – its political and financial future is uncertain.

“It will be interesting to see if they can raise a second fund. It’s not clear if they will,” said the investor source.

Reporting by Stephen Aldred

http://reut.rs/1Dwj2kc