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

4 minute read

By Stephen Aldred

HONG KONG (Reuters) – 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 center.

"If we believe Chinese private equity is going to rival the Carlyles and the Blackstones , 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 has completed a similar recent IPO in the region, with its $3.1 billion IPO for China Pacific Insurance Group <601601.SS>.


CDH won kudos for engineering WH Group's $4.9 billion purchase of Smithfield Foods Inc , the largest acquisition of a U.S. 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 on a bid to de-list a company in the U.S. It has recently been eyeing U.S. 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 and Goldman Sachs 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 percent of WH Group. "Why would somebody who's a butcher know the valuation better than CDH?" said a second investor.


The second and third letters in CDH's name stand for "Ding Hui", meaning "balance" and "potential".

Beijing-based CDH was spun out of powerful investment bank China Investment Capital Corp (CICC) in 2002. CICC is run by Levin Zhu, the son of China's former vice-premier Zhu Rongji.

In China, CDH has branched into venture capital, real estate, credit and public markets investing, prompting the comparisons with U.S. giant Blackstone Group, the world's biggest private equity firm, which pioneered the strategy of diversifying into multiple investment areas.

CDH raised only $102 million for its first standalone fund, but quickly found its way into a series of successful China deals, including stakes in sportswear company Li Ning Co Ltd <2331.HK>, display advertising firm Focus Media and China Mengniu Dairy <2319.HK>, according to Thomson Reuters data.

That first fund returned around 3.5 times its investors' money, according to data seen by Reuters, making it one of the top performing funds in China, and enabling it to raise capital for a series of bigger funds. Along the way, CDH and Goldman invested $256 million in a controlling stake in a struggling meat producer, then known as Shuanghui Group.

That buyout deal, one of the first of its kind in China, sparked controversy as opponents claimed the country was selling assets too cheaply to foreign investors. Goldman sold half its stake back to CDH in 2009 for five times what it originally paid.

"One of the primary problems Chinese companies face is that they are used to doing things a certain way in China, which is based on who you know, and who you trust," said Howie. "When you go overseas, the need for transparency and an honest assessment is higher, and they're bad at translating that."

Howie pointed to the $600 million paid out to two WH Group executives and the hiring of 29 bookrunners for the IPO as fundamental mistakes. "It's a case study in how not to do something," he said.

CDH's successes attracted big name investors into its funds, including California Public Employees' Retirement System and Canada Pension Plan Investment Board. So much so that 75 percent of CDH's private equity funds now come from international investors.

In January, CDH closed its fifth fund at $2.55 billion, nearly 25 times the size of its debut 2002 fund, underscoring the strong growth it has notched since inception.

Despite famously losing its head of venture capital, who ran away with his mistress, CDH's co-founders, Wu, Stuart Schonberger, who earned his B.A. from U.S. liberal arts school Wesleyan University, and dealmaker Jiao Zhen, are still together at the firm.

But recent funds have not matched earlier performance. The firm has been on a drive to return more money to its investors by exiting its investments, as Wu noted in his speech.

While CDH's 2002 fund is a top quartile fund, its 2010 fund has so far returned just over 1 times investors' money, and is in the bottom 25 percent of funds, according to data seen by Reuters.

(Editing by Denny Thomas and Ian Geoghegan)