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.


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 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.


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