Discovering fraud in potential investee companies is becoming more difficult, meaning many China GPs are steering clear of take-private deals, delegates heard at the HKVCA China Summit 2013.
A panel of private equity investment professionals offered words of caution over the privatisation of Chinese businesses from stock exchanges globally at the 12th China Summit organised by the Hong Kong Private Equity and Venture Capital Association.
A number of private equity firms have been recently involved in privatising China-based businesses listed on foreign stock exchanges. In May, CITIC Capital completed an $890 million buyout of NASDAQ-listed AsiaInfo Linkage, while shortly after, The Blackstone Group offered $662 million to take Pactera Technology private from the NASDAQ.
“To conduct due diligence on public companies is a lot harder and a lot of people have the wrong assumption that because the company is public, a lot of people would have vetted the company before,” Max Chen, executive director of Primavera Capital, said on the panel, adding that the firm has only completed one take-private out of 30 potential opportunities.
He explained that the typical two- to three-month due diligence is no longer sufficient when vetting a Chinese company because fraud is often so sophisticated that it is difficult to see.
“You have to pay particular attention to the background of the company, whether some of the numbers are too good to be true. At some point, when you aren't comfortable with some of the numbers and the people you are dealing with, you should just leave it. Discovering fraud in China is getting too hard these days.”
Derek Sulger, managing partner at Lunar Capital, said that while the development of this type of deal is a good example of firms becoming more creative in China, Lunar has looked at close to 100 take-private opportunities but is yet to feel comfortable actually doing a deal.
“The main thing I have concerns about in addition to due diligence, is any deal can be a great deal, but not at too high a price and I am yet to see one of these deals done at a reasonable price,” he said. “If you privatise a company at a high price, to think you're going to re-list it on a different exchange at a higher price, generally by the time [you do], the exchange that was trading at a higher price corrects in value – so your thesis suddenly disappears.”
CITIC paid a 53 percent premium on AsiaInfo's 30-day trading average, according to a company statement, while the Blackstone bid represented a 43 percent premium on its share price before the deal went public, according to a Pactera statement.
“To de-list [a company] is very challenging and sensitive,” William Shen, senior partner and head of Greater China at Headland Capital Partners, agreed. “[You have to] look at the fundamentals. If a company is not going to generate fantastic growth down the road – why do you think it will trade at a higher P/E multiple on another stock exchange?”
