The long-running saga that recently ended with Newbridge Capital agreeing to acquire an 18 percent stake in Shenzhen Development Bank (SDB) from the City of Shenzhen government highlighted both the opportunities and the pitfalls associated with foreign private equity firms investing in the Chinese banking sector.
The deal, reported to be worth around ¥1.2 billion ($145 million; €188 million), marks the first time that control of a Chinese mainland bank has passed into effective foreign ownership. While 72 percent of the firm's equity continues to be publicly traded, Newbridge has been handed a majority of the company's board seats. It will now be hoping that its period of ownership is not as testing as the negotiations that preceded it.
Newbridge, which was established in 1994 as an Asian investment vehicle for US private equity firms Texas Pacific Group and Blum Capital Partners, first reached agreement to acquire a stake in SDB in May 2003 but was informed shortly afterwards that the deal was off. SDB management were reported to have agitated against the deal, arguing that it was negotiated “above their heads” with government officials and also that a bank would have been a more favourable partner than a private equity firm.
Newbridge subsequently filed an international arbitration petition against SDB and four of its shareholders for breach of agreement. In addition, it took Chinatrust Commercial Bank of Taiwan, which had also held talks with SDB, to court in Texas, accusing it of “tortuous interference” in the agreement Newbridge and SDB had reached.
The legal actions were withdrawn two months ago for unspecified reasons, at which point it was assumed Newbridge would put the whole episode down to experience and walk away. Instead, the firm has not only come back to the negotiating table, but has once more agreed a deal, which at this point is subject only to regulatory approvals.
In some ways, Newbridge's dogged persistence seems surprising. Earlier this year, SDB was criticised by regulators for inadequate risk management, the way it accounted for bad loans, poor disclosure and conflicts of interest among board members. It has the highest non-performing loan ratio of any of the four listed Chinese banks, and only has reserves to cover 35 percent of bad loans.
Nonetheless, Newbridge will be bringing experience of the region's banking market gained from a $416 million investment in Korea First Bank in exchange for a 51 percent stake in 1999. It will hope to benefit from an increase in nationwide lending as increasingly affluent Chinese consumers continue to buy more cars and homes.
LONGREACH FUND REACHES $155M
Longreach Group, a new private equity firm targeting buyouts of Japanese companies, claims to have raised $155 million (Y17 billion) as part of a fundraising that is targeting $500 million. Longreach was founded by former UBS Securities Japan president Mark Chiba together with senior executives from Merrill Lynch Japan Securities and Morgan Stanley Japan. The fund will initially target investments in Japan from its Tokyo and Hong Kong offices, but is expected to extend its geographic reach to South Korea and greater China in due course. It will focus on opportunities in the industrial technology and financial services sectors. Chiba, the firm's founding partner and group chairman, said the limited partners attracted to the fund so far were Japanese in origin, but declined to name them.
ABN AMRO TARGETS ANZAC REGION
ABN Amro Capital has announced the launch of a A$300 million (€171 million; US$207 million) buyout fund targeting investment opportunities in Australia and New Zealand. ABN Amro will act as cornerstone investor in the fund by making a commitment equal to 40 percent of the total amount raised. The fund will invest between A$15 million and A$100 million in businesses with an enterprise value of between A$50 million and A$750 million.
JP Kaumeyer, the fund's managing director, said the launch of the fund reflected the continued growth of private equity opportunities in the region. ABN Amro Capital has been an active investor in the private equity markets of Australia and New Zealand since 2000.
ISRAELI CHINA FUND GETS LOCAL SUPPORT
Israeli investment groups Clal Industries and Investments, IDB Holding and the Israel Infinity Fund have closed a new $75 million venture capital fund for investment in China. The new fund will work alongside a “Chinese commercial entity” in Eastern China, which has not yet been named. IDB and Israel Infinity are reported to be hiring staff for the operation, which will begin operations in the next few weeks. The fund is believed to be the first foreign venture capital fund to get permission to operate and invest in China in partnership with a local fund, following a regulatory change by the Chinese Government earlier this year.
CALSTRS SETS SIGHTS ON ASIA
Trustees of the California State Teachers Retirement System (CalSTRS), the US public pension scheme, have voted to invest in Asia for the first time. CalSTRS has so far focused its private equity investments on North America and Western Europe. But trustee Steve Westly told the Sacramento Bee: “Many of the fastest growing economies in the world are not in Europe or North America. They're in Asia. It's important that we begin the process of expanding our portfolio.” It is estimated that the decision could free up hundreds of millions of dollars for investment in fast-growing economies. CalSTRS is the third-largest public pension fund in the US with $113.2 billion in assets. It is currently investing a $10.1 billion private equity program, $5.5 billion of which has already been committed.
DATANG IS A FIRST FOR WARBURG PINCUS
The global private equity firm has agreed to invest $70 million in semiconductor firm Datang Microelectronics, a unit of Datang Telecom Technology, in what is the first investment by a US company in a state-owned Chinese business. Datang Microelectronics develops and makes integrated circuits and supplies chips to China's new smart identity cards, which will shortly replace the old paper ones. The new capital will help fund research and development and the expansion of the firm's operations. The investment is being made in a series of steps including a convertible bond issue, and is expected to result in Warburg Pincus owning a stake of more than 30 percent.
TOKYO UNIVERSITY SEEKS INVESTORS
Tokyo University has launched a Y20 billion ($190 million; €150 million) venture capital fund with the aim of turning academic research into commercial enterprises.
The University has committed Y10 billion to the fund, known as University of Tokyo Edge Capital (UTEC), and is setting out to raise the same amount from institutional investors, private equity firms and corporates. The fund will exploit the commercial potential of the University's science labs and form start-up companies. The University has appointed Satoru Yamamoto as its president. He was previously president at the investment arm of Tokio Marine Capital.
TRIMORE IN AIRLINE TALKS
Victor Li, the son of Hong Kong billionaire Li Ka-shing, is reportedly close to buying a 45 percent stake in CR Airways, the struggling Hong Kong airline, through his Trimore Investment vehicle. CR Airways, which needs a cash injection to fund its operations in mainland China, has ended talks regarding the sale of an 85 percent stake to China's Hainan Airlines for around HK$200 million (US$25.6 million).
BAHRAIN'S TAIB BACKS INDIA FUND
TAIB Bank of Bahrain is reported to have entered into a memorandum of understanding to become a cosponsor and lead foreign investor in the new Leverage India Fund, which is hoping to raise around US$110 million.
The fund, which will make later-stage investments in Indian companies, is jointly sponsored by Punjab National Bank, the Indian bank, and Infrastructure Leasing & Financial Services Limited (IL&FS), a fund management company listed on the Bombay Stock Exchange.
Leverage India Fund is proposing to make around 15-20 investments in companies operating in sectors including manufacturing, engineering, life sciences and infrastructure.
TAIB has owned a Bangalore, India-based subsidiary, TAIB Capital Corporation, since 1995 and has actively participated in a number of private equity transactions in the country.