The sun sets on Shenzhen

TPG Capital divested its remaining shares in Ping An Insurance in September, marking the end of a landmark investment and a landmark return.

The financial services sector in Asia may be notoriously tricky to transact in, but TPG Capital has just provided further proof that if you are prepared to tackle a mountain of uncertainty, you may just reap a mountain of returns.

The global private equity firm chose September to sell its remaining stake in Chinese insurer Ping An Insurance, divesting what was left of the legacy of its 2004 investment in Shenzhen Development Bank (SDB) and recording a 16.5x return.

TPG first invested in the bank through its then Asian affiliate Newbridge Capital, which was brought under the TPG umbrella in 2006. Newbridge had attempted, but failed, to buy into the bank twice before the deal actually went through: once in 2002 and then again in 2003. The deal took two years to materialise, because Chinese stakeholders in the bank allegedly tried to sell their shares to Taiwanese bank Chinatrust Financial, in an attempt to scupper the investment. TPG reacted to this by filing suit against Chinatrust, accusing the Taiwanese bank of interfering with the firm’s purchase plans. The dispute was eventually resolved and the deal finally gained approval from the China Banking Regulatory Commission (CBRC) in 2004.

The firm paid RMB1.2 billion, which at the time converted to $145 million, for a 16.76 percent stake in SDB. The purchased stake constituted a controlling interest in the bank’s management by virtue of its being the bank’s largest shareholder – as such it was first-ever sale of a controlling interest in a Chinese bank to a foreign investor.

The ground-breaking deal was led by Weijian Shan, former partner at TPG and for years the firm’s leading dealmaker in China. Post-investment, TPG acted to reverse the fortunes of the poorly performing bank, increasing its assets under management more than three times and reducing its bad loan ratio from 11.4 percent to 0.6 percent, according to a report in the Financial Times.

Five years later, in June 2009 when the lock-up period of TPG’s holding in the bank had expired, the private equity firm began negotiations to divest its interest in SDB with Hong Kong-listed Chinese insurance company Ping An Insurance. Ping An, already a 5 percent stakeholder in SDB, wanted to increase its holding in the bank.

However, yet again there was a delay imposed by the regulatory approval process and it wasn’t until May this year that Ping An was finally granted approval by the China Securities Regulatory Commission (CSRC) to go ahead. The insurance giant purchased TPG’s holding of 520.5 million shares in SDB in exchange for 299 million newly issued Ping An shares. As such, the transaction saw TPG fully exit its stake in SDB, and become a 4 percent shareholder in the Chinese insurance giant, with no lock-up period imposed.

The buyout firm moved quickly to sell a little more than half of its stake only one week after the swap. Some 160 million shares were sold at HK$60.6 (€6.2; $7.8) per share, generating HK$9.7 billion, or $1.25 billion in proceeds. The share sale gave the buyout firm a 16x return on 54 percent of its stake in Ping An.TPG then waited until September for the sale of its remaining Ping An shares, raising another HK$9.1 billion. The shares were reportedly sold at HK$65.3 each.

In total, TPG has raised about $2.4 billion through the share sales, which translates to a 16.5x return on the firm’s original investment – a landmark return on a landmark private equity transaction.

Weijian Shan, meanwhile, after seeing a successful conclusion to his headline deal, left TPG to join Hong Kong-based Pacific Alliance Group as chairman and chief executive in July this year. He is to raise a pan-Asian buyout fund at his new firm, where, no doubt, his new colleagues will be hoping he can replicate the success of the Shenzhen deal.