The Hong Kong-based direct secondaries firm bought a 24 percent stake in China Hydroelectric Corporation in 2011.
At the time, the New York-listed CHC, which operates 25 hydroelectric plants in China with 506MW of capacity, had a very high cost base due to rapid expansion. General and administrative (G&A) expenses were rising sharply and it had a $100 million liquidity hole.
NewQuest decided in the summer of 2012 – when the stock price was its lowest and management had destroyed most of the company’s value – that it needed to be in the driver’s seat. “Unfortunately, that meant engaging in a very public and contested battle for control of the company’s board,” said NewQuest managing partner Darren Massara. Obtaining control was a complex process lasting over three years, replete with SEC filings, back and forth with management, as well as a battle to gain support of its shareholders.
When the fight was won, NewQuest began leadership changes, replacing the CHC board and senior management. To reverse the liquidity shortfall, NewQuest cut costs, reducing G&A expenses by over 60 percent, through the office closures and headcount reductions. NewQuest “rescued China Hydroelectric Corporation from massive shareholder value destruction”, said judge Lian Hoon Lim, a managing director with AlixPartners.
“Plant utilisation was improved from 28 percent to 40 percent, resulting in revenues increasing 62 percent over three years. Combine this with G&A improvements and lower debt costs from refinancing resulted in EBITDA improving by 113 percent over three years, making CHC the winner in this category,” Lim said.
After NewQuest bought 55 percent into CHC, it took the company private, which saw NewQuest boost its stake to 95 percent in 2014. “Post the take private transaction, we anticipated that it may take another three years to fully realise our operational value addition initiatives. However, after about a year as a private company, most of our objectives had already been reached,” Massara said.
The sale process, which garnered interest from 20 parties, half of which were Chinese state-owned enterprises, took six months, with Shenzhen Energy acquiring the company in a deal worth $542.6 million.
“Most control-oriented investors would have acquired a majority stake through a single transaction, established an operational plan from day one, implemented that plan over the course of several years, and then successfully exited,” Massara said.
“In our case, we had a passive stake at the outset and had to fight tooth and nail over several years to gain operational control of the company. We then took the extra step to take the company private and ultimately were able to achieve the value addition goals we set out at the beginning, generating meaningful returns.”