Big buyout firms find size isn't all in China business

High-profile missteps tell a cautionary tale as investors lick their wounds and rethink their approach to a huge and complex market

PUBLISHED : Tuesday, 23 April, 2013, 12:00am
UPDATED : Tuesday, 23 April, 2013, 7:03am

Some of the world's biggest private equity players are learning the hard lesson that size does not guarantee success when it comes to making investments in China.

Industry sources have told the South China Morning Post that US buyout giant TPG Capital recently began to sell its entire holding in a Shanghai-based leasing firm, ending a bad five-year relationship with it.

Many industry watchers described it as a textbook case of how challenging the deal-making environment in China is, despite all the upbeat news headlines.

"Apparently, TPG wants to put the story to an end," said one source. "Everybody is more cautious than a couple of years ago when making deals in China. We've seen many [similar] cases, and lessons should be learned."

TPG's plan to exit from its investments in UniTrust Finance & Leasing Corp, formerly known as Nissin Leasing (China), came after some of its rivals ran into difficulty doing deals or managing local firms on the mainland, despite pouring money into China in a bet on business growth.

In 2008, TPG bought a 60 per cent stake in Nissin for US$275 million. Just a few months later, a dispute erupted with the firm's local management. The Financial Times reported that police were called in when the local managers tried to stop TPG representatives taking control.

TPG later managed to calm the situation and improved its relationship with those managers, but by then the case had already attracted industry attention.

TPG has run into trouble with other deals in China. In Hong Kong, observers say TPG made a bad bet early last year, when it invested in Li Ning, a big mainland-based, Hong Kong-listed sportswear maker and retailer.

In January last year, TPG and Singapore state investor GIC put about US$120 million into Li Ning in a purchase of convertible bonds. Li Ning's stock was trading at HK$6.72 when the deal was announced. About a year later, Li Ning reported its first annual loss since its 2004 listing. As of Monday, Li Ning's stock had lost more than 38 per cent of its value since TPG and GIC invested in it.

Li Ning blamed the mainland's economic slowdown for the loss, but some analysts said it lacked a clear business strategy.

TPG's long-time rival Bain Capital also got its fingers burned after investing in Gome, a home appliance retailer, in 2009. Gome's Hong Kong-listed shares rose, then sank to below the price Bain had paid for them and have yet to recover, largely because of an internal power struggle and legal problems related to its founder and controlling shareholder, Wong Kwong-yu.

"[The private equity industry] has moved on from the false supposition that big funds can always make better investments in China," said an industry veteran who led one of the largest funds in Asia but quit to launch his own small fund.

"I don't know if these days the popular saying 'small is beautiful' is right, but all the cases and lessons you see tell you not to rely on big funds just because they are big," he said.

Other industry watchers say private equity in China is more about who is running a fund than a fund's name. TPG, for instance, has lost two China heavyweights - Shan Weijian and Mary Ma - in the past few years.

Both Shan, a professor turned deal-maker, and Ma, a former chief financial officer at Lenovo, are respected and connected in China, and at the firms they have since set up, have made some exclusive deals that could generate big returns in coming years.