Asia Private Equity Review - Greation China Edition

This online issue of the Asia Private Equity Review - Greater China Edition is made available with abbreviated content. To read the full content together with more in-depth news, perspectives, and analysis, please subscribe or contact us to purchase back issues.

May 2010 Issue
 二零一零年五月號

Content 內容提要


Feature
 封面文章

Analysis
本期關注

Case Study
案例研究

News
動態透視

Institutional Investors
機構投資者

Funds
基金動向

Investments
投資聚焦

Divestments
資金套現

The Lens
圈內透視

Window of the world
世界之窗

People on the Move
人物花絮

Summary : Subscribers’ weekly
每週摘要

Summary : Deal
交易摘要

Stock Watch
股價表現

Index & Exchange Rates
索引及匯率

 

Curdled Milk

In the beginning, it was an initial public offering dream after having successfully raised over US$73 million from a marquee list of global private equity firms. But as the September 2008 melamine scandal, in which traces of toxic chemical were found in baby formula, enveloped China’s dairy products industry, Hunan Taizinai Group (湖南太子奶集團)(‘Taizinai’) had to shelve its public company aspirations. Since then, the once leading milk products company has not only been under the watch list of its foreign investors, but also under the care of its local government authority, the Zhuzhou government (株州市人民政府). In April, Taizinai’s path to become a publicly-listed company outside of its home market was blockaded when its creditor banks sought a court order to appoint provisional liquidators. Taizinai had a debt burden of some Rmb2.1 billion (US$307.2 million). Taizinai’s plight exposes a host of challenges in making investments in China. More importantly, it draws attention to foreign investors’ feeble grounds on claims of assets in China held through the prevailing commonly used investment structure.

Hunan’s Biggest Bottle of Yogurt
In early 2007, Actis, Morgan Stanley and Goldman Sachs committed a total of US$73 million to Taizinai. It was the single largest investment made to a dairy company in Hunan province. Actis, which had firmly established its credentials as an investor in China’s milk products industry following its legendary success in China Mengniu Dairy Company Ltd. (中國蒙牛乳業有限公司)(‘Mengniu’), led the transaction and invested US$40 million.

Founded in 1996, Taizinai is one of the largest lactobacillus drink manufacturers in China. Taizinai had all the credentials to become a central player in China’s dairy products market. At the time the foreign investors injected capital into Taizinai, the milk beverage and yogurt products maker accounted for 15% of total market share and was projected to double in size by 2010 (fig. 1).

Prior to raising US$73 million from the consortium of foreign investors, Taizinai was known to have borrowed Rmb500 million from six foreign banks, with Citigroup being its biggest creditor. Following these two rounds of fund raising, Taizinai embarked on an ambitious expansion programme, as part of a plan for a public debut on bourses outside of its home market. In preparation for this, Taizinai’s domestic assets were held through China Taizinai (Cayman) Ltd. (中國太子食品有限公司(開曼)), a Cayman Islands-registered vehicle (fig. 2).....

This online issue of the Asia Private Equity Review is made available with abbreviated content. To read the full content together with more in-depth news, perspectives, and analysis, please subscribe or contact us to purchase back issues.

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Institutional Investors 機構投資者
Confusing Casts
Unclear demarcation between LPs and GPs in China funds

Ever since the limited partnership structure came into effect in 2007, it has been the norm for virtually all funds launched in China. But as the number of domestic funds continues to mushroom (fig. 12), it has become increasingly clear that the limited partnership structure adopted by China’s domestic funds is vastly different from that commonly used on the international playing field. The confounding roles of limited partners (‘LPs’) and general partners (‘GPs’) in such domestic limited partnership funds have not only added complications to the management of a fund, but also beg answers to corporate governance issues. The recent establishment of Huafeng Fortune (Beijing) Management Co., Ltd. (華豐達晨（北京）投資基金管理有限公司)(‘Huafeng Fortune’) is the latest to testify that such a structure is becoming entrenched in China’s domestic private equity fund market.

The Hunan-based Hunan TV & Broadcast Intermediary Co., Ltd. (湖南電廣傳媒股份有限公司)(‘Hunan TV’) is one of the most seasoned investors in venture capital funds. In 2000, it sponsored the launch of Shenzhen Fortune Venture Capital Co., Ltd. (深圳市達晨創業投資有限公司)(‘Shenzhen Fortune’). After more than a decade as a fund management firm, Shenzhen Fortune has a stable of nine funds that principally focus on technology companies in growth stages (fig. 13a & 13b). As at the end of 2008, its total assets under management were around Rmb25.03 billion (US$3.7 billion), with 60 companies in its portfolio. Among them, Shenzhen Coship Electronics Co., Ltd. (深圳市同洲電子股份有限公司) was one of the most outstanding investments. The electronics company was among the first that went public on the Small and Medium Enterprise Board of the Shenzhen Stock Exchange. Since then, Shenzhen Fortune has clocked a return of over Rmb270 million, representing a return multiple of around 28 times.

After more than a decade of wearing the GP cloak, Shenzhen Fortune will assume the role as a limited partner in Huafeng Fortune. It will take a 55% equity stake in the fund management firm through a commitment of Rmb16.5 million. The remaining equity interest will be taken up by another subsidiary of Hunan TV as well as by Mr Liu Hong (劉洪), who is an executive in the management of Huafeng Fortune (fig. 14 & 15).

In the recently-formed Xiamen Hongtu Venture Investment Fund (‘Xiamen Hongtu’), a guidance fund that is sponsored by the Xiamen provincial government, Shenzhen Capital Group Co., Ltd. (深圳市創新投資集團有限公司) (‘Shenzhen Capital’) is one of three major investors. The venture capital investment arm of the Shenzhen municipal government will subscribe Rmb30 million, or 30% of Xiamen Hongtu’s Rmb100 million fund pool.

Established in 1999, Shenzhen Capital is a pioneer in China’s venture capital investment industry. Since commencing its investment programme, Shenzhen Capital has established 44 funds representing an aggregate fund pool of Rmb8 billion. It boasts a portfolio of 261 companies, not only at home, but also abroad. In recent years, it has increasingly taken on the role as an investor in funds, while continuing its mandate as a general partner. In addition to Xiamen Hongtu, it has also made allocations to The East Gate New Asian Media & Technology Fund and Shaanxi Aerospace Hongtu Venture Capital Industrial Fund (fig. 16).

Perhaps in emerging private equity markets it is not possible to adhere to a well-defined international fund management framework in which the fiduciary responsibilities of LPs and GPs are clearly defined. The rise of Tripod Capital International Ltd. (鼎鑫國際資本)(‘Tripod’) validates such a point. In 2006, the current management team of Tripod left Torch Investment Co., Ltd. and set up a maiden fund that had a capital pool of Rmb150 million. Over two-thirds of this fund pool was held via a vehicle controlled by Tripod, with the remaining pool of capital from the Hong Kong-listed Weichai Power Co., Ltd. (fig. 17). The previous confounding fund management structure that helped incubated Tripod did not appear to have bothered foreign investors. In early April, Tripod successfully raised over US$350 million from a long list of foreign investors for its latest fund.

When it comes to private equity in China, it is the fund managers’ future promises rather than their past that govern subscriptions of funds from international institutional investors.

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