Themes seals $218m Standard Water exit

The Hong Kong-based PE firm has sold its stake in the Chinese company to Beijing Water.

Cross-border private equity firm Themes Investment Partners has completed the sale of Standard Water to Hong Kong-listed Beijing Enterprise Water Group for about $218 million, according to a statement from the buyer.

Themes, which owned close to a 70 percent stake in the company, will receive both cash and shares in the Group, which will also assume debts at the asset level.

Beijing-based Standard Water is a developer of sewage and waste water treatment systems with 36 plants around China.

Frank Yu, founder and chief executive officer at Themes, described Standard Water as a turnaround play.

In 2010, Standard Water pulled its Hong Kong listing application after Ernst & Young resigned as auditor, citing inconsistencies in the company’s accounting documents. E&Y refused to provide audit documents to securities regulators, citing China’s state secrecy laws. The same issue arose with the China-based clients of the other Big Four accounting firms, which escalated into a dispute with regulators in Hong Kong and the US. 

“The first thing we did was to understand if there had been any fraud,” Yu said. “With our own in-depth due diligence and the help of professional parties including top-notch Big Four auditors and law firms, we concluded that all the accounting issues had been addressed. The buyer and multiple bidders also did exhaustive due diligence at every level, which made us confident.”

Themes brought in a new chief financial officer and other senior managers during the three-year holding period to bring the company to the next level in terms of corporate governance and financial management, Yu said. “The investors took over the control of the company and its board and I personally led the M&A exercise, which represents a milestone in the wastewater industry consolidation.”

Themes is primarily focused on life science investments that have a US-China synergy. In 2011, the firm took a 13 percent stake in Shenzhen-based Lifetech Scientific, a Hong Kong-listed developer of medical devices. Last year, US multinational Medtronic bought a 19 percent stake in Lifetech for $66 million. 

Another portfolio company, Beijing-based China Animal Healthcare, a developer of drugs for poultry and livestock, also attracted a multinational. Last year, a division of US pharmaceutical giant Eli Lilly invested $100 million in the company. 

Yu believes Themes' primary focus on cross-border deals in the life sciences sector has little competition. His firm has made eight investments in US healthcare companies from Ally Bridge Fund II, a $250 million global vehicle (rebranded from Themes Fund II) that closed in 2011 and is “already making significant distributions to investors”, he said.

“Life science investments are very hard work involving lots of intellectual capital, so most people tend not to bother. But if you have the knowhow to make a deep dive, you can produce exceptional returns,” said Yu, who was formerly a managing director of hedge fund Och-Ziff Capital and prior to that, a managing director at Goldman Sachs.

He adds that generally valuations remain high in China, despite the 15-month closure of the domestic IPO markets, which only recently re-opened.

“Valuations in China are very rich,” he says. “We don’t rely on the China market, but we try to be a bridge between China and the global markets. We invest in US companies with more reasonable valuations and bring them into China. At the same time, we help Chinese companies to make overseas partnerships and acquisitions.”