Benefit of the doubt

By now it’s widely known that the Muddy Waters’ research – which alleged fraud at Chinese forestry company Sino Forest – has been refuted, after an in-house investigation verified cash balances, total revenue and book values and confirmed rights to timber assets. Sino Forest is “a real company, with real assets and real revenue”, and “a short seller” profited from allegations, the company said in a statement.

Some in the financial industry have already reportedly challenged the independence of the investigation by Sino Forest, which expects to issue a final report by year-end. But if the results ultimately vindicate the company, the negative perception of Chinese companies listed overseas – a number of which have private equity firm investors – could see some improvement.

A number of Chinese companies have had their trading suspended after allegations of accounting irregularities, including Carlyle Group portfolio companies China Forestry and China Agritech. In June, the Financial Times reported that at least 21 Chinese companies trading on the Nasdaq and NYSE Euronext exchanges had their trading suspended in the past year, with five de-listed completely. Listed Chinese companies as a group have been tainted as a result – and nearly all have seen their valuations plunge.

But some Asia-focused private equity firms are seeing an opportunity in this development. They’re now searching for overseas listed Chinese firms that could be taken private and perhaps re-listed in Hong Kong, where investors have a clearer understanding of China – and a higher comfort level.

“[PE firms] are looking around China and see valuations are very high,” says Maurice Hoo, Hong Kong-based partner at law firm Orrick, Herrington & Sutcliffe. “Where will they find companies with valuations very low? Among companies [listed] in the US. Every fund I work with would have people working on that type of opportunity.”

Take-private deals have already begun with Nasdaq-listed firms. Fushi Copperweld recently received a revised $353 million joint offer from its chairman and CEO Li Fu and Hong Kong’s Abax Global Capital. In May, Bain Capital bought China Fire & Security Group in a $266 million deal. Shanda Interactive, an online game developer, recently said it will be taken private by an investment group led by company CEO Tianqiao Chen, in a deal would value Shanda at around $2.3 billion. Reputational damage might be bad for shareholders, but it’s great for potential buyers.