Pulled IPO shows China private equity not yet ready for world stage

Pulled IPO shows China private equity not yet ready for world stage

HONG KONG - China's biggest buyout firm, CDH Investments, is known as "The Blackstone of China" for its savvy deal making and spread of businesses, but last month's pulled IPO of pork producer WH Group Ltd is a setback to its global ambitions.

The deal thrust a spotlight on CDH, which first invested in WH Group in 2006, and exposed its limited experience in handling big IPO exits from its investments in a global financial centre.

"If we believe Chinese private equity is going to rival the Carlyles and the Blackstones (BX.N: Quote, Profile, Research, Stock Buzz), they need to clearly be able to demonstrate they can do deals - and successful deals," said Fraser Howie, co-author of "Red Capitalism".

"Not just a deal, but have a pattern of operating successfully in a number of different fields, and frankly, no Chinese company in any industry has shown its ability to do that yet," Howie added.

The original $5.3 billion IPO by WH Group would have been the biggest for a private equity backed company in Asia. Only Carlyle Group (CG.O: Quote, Profile, Research, Stock Buzz) has completed a similar recent IPO in the region, with its $3.1 billion IPO for China Pacific Insurance Group (601601.SS: Quote, Profile, Research, Stock Buzz).


CDH won kudos for engineering WH Group's $4.9 billion purchase of Smithfield Foods Inc SFII.UL, the largest acquisition of a US company by a China firm, and Wu Shangzhi, its co-founder, a former World Bank banker and an elder statesman of China private equity, suggested China's economic power would lead to more such deals.

"The competitive advantage certainly now is pointing to a different direction. There is a compelling reason for the transaction, there are going to be more of these happening," Wu said in a speech in Hong Kong.

CDH, along with peers including CITIC Capital and Hony Capital, is among a number of China firms eyeing global deals to distinguish themselves from domestic competitors as they vie for investor dollars.

CDH, which has offices in Singapore and Jakarta and investments in Japan and Vietnam, teamed up with global private equity firm TPG Capital TPG.UL on a bid to de-list a company in the US It has recently been eyeing US capital markets as a source of funds, bankers said, underscoring its aspirations to grow beyond its home market.

A successful WH Group exit would have cemented CDH's position, but the drawn-out collapse of the deal, mired in bad luck and blunders, generated a slew of negative headlines, and meant investors including CDH, Temasek Holdings TEM.UL and Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) missed raising $1.8 billion. CDH had offered a stake of nearly $660 million.

"It would undoubtedly have been a boost for CDH, as they invested into WH Group from at least three of their funds," said one investor in the private equity firm's funds.

CDH declined to comment for this article.

Sources involved with the IPO told Reuters that CDH played an aggressive role in pricing the deal, even though it only held 34 per cent of WH Group. "Why would somebody who's a butcher know the valuation better than CDH?" said a second investor.

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