Observers say that when a foreign private equity firm is considering buying a Chinese company it's amazing to witness the sheer numbers of men in grey suits that often descend on the target. No, they say, this is not a deliberate attempt to intimidate managers unacquainted with the wiles of the LBO world into making a false move at the negotiating table. It is, in fact, a very necessary assembling of accounting talent.
“At the moment, private equity buyers will typically send in huge accounting teams,” says David Eich, head of the Hong Kong office at law firm Kirkland & Ellis. “And it's not because of the labyrinthine demands of cross-border due diligence. It's to create a whole new set of books when the existing ones can't be relied on.”
All of which might be about to change, thanks to new accounting rules introduced by the Chinese Ministry of Finance in January 2007. The rules involve compliance with 39 standards structured to reveal the economic value of a firm, with the aim of using market prices wherever possible. “It doesn't mean that Chinese companies will necessarily meet IFRS or GAAP standards, but it will take them a lot closer,” predicts Eich.
For the time being, the rules will apply only to listed companies. However, where new accounting standards have been introduced in other countries, they have often been adopted by the largest and/or listed companies first before gradually becoming universal. Sources say this should also happen in China, whether by way of a natural trickle-down effect or through the law makers forcing the rules on everyone in due course.
In Eich's view, such a development would be viewed as a “sea change” by private equity firms lured by China's growth prospects but troubled by lax corporate governance. In the years ahead, expect to see more deal executives checking in for Beijing-bound flights and rather fewer number crunchers.
INDIA HITS DEAL RECORD
There were 299 private equity deals completed in India worth a record $7.46 billion (€5.76 billion) in 2006, well above the 148 deals worth $2.2 billion in 2005, according to the latest findings by Venture Intelligence India, a data provider. Arun Nataranjan, founder of Venture Intelligence, attributed the jump to the “mega-deal phenomenon” marked by KKR's buyout of Flextronics and a couple of large deals involving telecommunication services companies. In the last quarter of 2006, Providence Equity Partners and a number of other firms, including Sequoia Capital, ChrysCapital, Citigroup and Macquarie Bank, invested a combined $966 million in a pre-IPO share placement by India's Idea Cellular.
EQT CLOSES $545M CHINA FUND
EQT, a Nordic private equity group with operations in Europe and Greater China, has received commitments of $545 million (€420 million) for its EQT Greater China II fund. It will focus primarily on mid-market buyout and control investments based in or connected with China, Hong Kong and Taiwan. EQT Greater China II will be one of the Greater China region's largest funds focused specifically on control investments, and is a continuation of the strategy established by Investor Capital Partners – Asia Fund, the predecessor fund, which closed in 2000.
MEKONG CAPITAL GETS WIRED
Mekong Capital, a Vietnam-focused GP, will invest up to $6.25 million (€4.8million) in Ngo Han Joint Stock Company, a Vietnamese magnet wire manufacturer. An initial $1.91 million has already been committed. The Ho Chi Minh-based fund manager expects to invest more capital from Mekong Enterprise Fund II, a $50 million investment vehicle, after laws on foreign ownership in private companies are clarified, according to a statement. In early 2004, Mekong invested $1.85 million from its maiden 2002 fund in the company. Ngo Han is planning to list on Vietnam's stock market in 2008, said Chris Freund, managing director of Mekong Capital.
BLACKSTONE OPENS IN HONG KONG
Alternative assets giant The Blackstone Group plans to expand its private equity investment business in the Asia Pacific region through a base in Hong Kong. The office will be coled by Antony Leung and Ben Jenkins. Leung was the Financial Secretary of Hong Kong from 2001 to 2003. Before that, he was chairman of Asia for JP Morgan. Jenkins is a senior managing director at Blackstone in the New York office. He will relocate to Hong Kong to become the chairman of Blackstone Greater China.
STANDARD CHARTERED MOVES INTO PROPERTY
Standard Chartered Private Equity, the private investment arm of Standard Chartered bank, has invested $35 million (€27 million) in Sino Ocean Real Estate Development Co, a property developer that is expanding beyond its Beijing stronghold to major cities such as Tianjin and Dalian in China's Bohai Economic Zone. Sino Ocean, the property arm of Cosco International Holdings, a large Chinese shipping concern, develops residential products as well as office buildings.
ARC CAPITAL PARTNERS BUYS INTO DAIRY FIRM
ARC Capital Partners, manager of a $120 million (€93 million) fund listed on London's AIM market, will invest alongside two Chinese partners for a controlling stake in Ningxia Xiajin Dairy Group, the largest dairy company in China's Ningxia autonomous region, a statement said. ARC will invest $18.1 million for an approximate 40 percent stake in Xiajin, Clement Kwong, a managing director of ARC, said. ARC is partnering with Wumart Holdings, a Hong Kong-listed retailer and Yinchuan Xinhua Department Store Company, the firm's current controlling shareholder, to form a joint venture. Wumart and Yinchuan Xinhua will invest a combined $18.9 million in the joint venture. Upon completion of the deal, the joint venture – named Ningxia ARC Dairy – will hold an approximate 79.7 percent stake in the dairy business.
CONSORTIUM BUYS 5% OF INDIAN STOCK EXCHANGE
A group of investors including General Atlantic, Goldman Sachs, Softbank Asian Infrastructure Fund and the NYSE Group are each buying five percent stakes in India's National Stock Exchange (NSE). The NYSE, parent company of the New York Stock Exchange, said it paid $115 million (€89 million) for its stake. Based on this figure, the total value of the combined 20 percent stake is $460 million – which values the NSE at roughly $2.3 billion. The NSE will continue to be led by Ravi Narain, managing director and chief executive. The investment is the maximum allowed under India's foreign direct investment laws governing stock exchanges.
EICH TO SPEARHEAD KIRKLAND'S ASIA PUSH
Kirkland & Ellis, a law firm with a US and European presence, has opened its first Asian office in Hong Kong. The office will be led by David Patrick Eich, a private equity partner who has relocated from London. Joining Eich in Hong Kong are Chuan Li, a partner from Kirkland in Chicago, and Tai Hsia, a senior associate from Kirkland's London office. The new Hong Kong team comprises more than 20 lawyers in all from Kirkland's US and European offices.
HARBOURVEST PROMOTES IN HONG KONG
Harbourvest Partners, a global fund of funds manager, has promoted Hemal Mirani, a fluent-Japanese speaker, to managing director. Mirani joined the firm's subsidiary in Hong Kong as an analyst ten years ago, according to a statement. The promotion comes shortly after Harbourvest closed its fifth international fund-of-funds at €2.8 billion. The fund of funds includes HIPEP V-Asia Pacific and the Rest of World Fund, a $527.3 million investment vehicle. Mirani helped establish Harbourvest's presence in Asia Pacific by developing relationships with fund managers and the firm's clients.
AIF CAPITAL ASIA REACHES $435M CLOSE
AIF Capital Asia has reached a final close on $435 million (€332 million) for its most recent pan-Asia private equity fund. The fund had a target of $350 million. AIF Capital Asia III will focus on companies in China, India and elsewhere with enterprise values of between $50 million and $500 million. According to a statement, the firm has already made two investments, in China and India, from the new vehicle. According to a professional at the fund's placement agent BerchWood Partners, nearly 50 percent of the new capital in AIF Capital Asia III came from European limited partners.
APOLLO TO INVEST $2BN IN INDIAN REAL ESTATE
The real estate arm of US buyout firm Apollo is set to invest $2 billion (€1.54 billion) in property in India through a joint venture with a local group. Apollo Real Estate Advisors has teamed up with SUN Group, a local Indian investment company, to raise a $630 million fund. With debt, this could mean the venture has around $2 billion of firepower to invest in the region. The two firms started fundraising in April last year and held a first close in August. A global spread of institutional investors and high-net worth individuals have invested.