Big buyout firms find size isn’t all in China business; High-profile missteps tell a cautionary tale as investors lick their wounds and rethink their approach to a huge and complex market

Big buyout firms find size isn’t all in China business

Tuesday, 23 April, 2013, 12:00am

George Chen george.chen@scmp.com

High-profile missteps tell a cautionary tale as investors lick their wounds and rethink their approach to a huge and complex market

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Some of the world’s biggest private equity players are learning the hard lesson that size does not guarantee success when it comes to making investments in China.

Industry sources have told the South China Morning Post that US buyout giant TPG Capital recently began to sell its entire holding in a Shanghai-based leasing firm, ending a bad five-year relationship with it.

Many industry watchers described it as a textbook case of how challenging the deal-making environment in China is, despite all the upbeat news headlines.

“Apparently, TPG wants to put the story to an end,” said one source. “Everybody is more cautious than a couple of years ago when making deals in China. We’ve seen many [similar] cases, and lessons should be learned.”

TPG’s plan to exit from its investments in UniTrust Finance & Leasing Corp, formerly known as Nissin Leasing (China), came after some of its rivals ran into difficulty doing deals or managing local firms on the mainland, despite pouring money into China in a bet on business growth.In 2008, TPG bought a 60 per cent stake in Nissin for US$275 million. Just a few months later, a dispute erupted with the firm’s local management. The Financial Times reported that police were called in when the local managers tried to stop TPG representatives taking control.

TPG later managed to calm the situation and improved its relationship with those managers, but by then the case had already attracted industry attention.

TPG has run into trouble with other deals in China. In Hong Kong, observers say TPG made a bad bet early last year, when it invested in Li Ning, a big mainland-based, Hong Kong-listed sportswear maker and retailer.

[1]In January last year, TPG and Singapore state investor GIC put about US$120 million into Li Ning in a purchase of convertible bonds. Li Ning’s stock was trading at HK$6.72 when the deal was announced. About a year later, Li Ning reported its first annual loss since its 2004 listing. As of Monday, Li Ning’s stock had lost more than 38 per cent of its value since TPG and GIC invested in it.

Li Ning blamed the mainland’s economic slowdown for the loss, but some analysts said it lacked a clear business strategy.

TPG’s long-time rival Bain Capital also got its fingers burned after investing in Gome, a home appliance retailer, in 2009. Gome’s Hong Kong-listed shares rose, then sank to below the price Bain had paid for them and have yet to recover, largely because of an internal power struggle and legal problems related to its founder and controlling shareholder, Wong Kwong-yu.

“[The private equity industry] has moved on from the false supposition that big funds can always make better investments in China,” said an industry veteran who led one of the largest funds in Asia but quit to launch his own small fund.

“I don’t know if these days the popular saying ‘small is beautiful’ is right, but all the cases and lessons you see tell you not to rely on big funds just because they are big,” he said.

Other industry watchers say private equity in China is more about who is running a fund than a fund’s name. TPG, for instance, has lost two China heavyweights – Shan Weijian and Mary Ma – in the past few years.

Both Shan, a professor turned deal-maker, and Ma, a former chief financial officer at Lenovo, are respected and connected in China, and at the firms they have since set up, have made some exclusive deals that could generate big returns in coming years.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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