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China Private Equity PE Asia 9th December 2011

AIMing high
650 words 9 December 2011 Private Equity Asia PEI English Copyright 2011. PEI Media Ltd. All rights reserved.

UK-listed China Private Equity recently marked the second anniversary of its AIM listing and is moving closer to making its first exit China Private Equity Investment Holdings (CPEIH), which listed on the UKs Alternative Investment Market in late 2009, uses a structure different to the general partnership framework favoured by many private equity firms. It was easier to structure the business as a company rather than as a general partnership, says chief financial officer Ernest Wong. You have greater liquidity than with a closed ended fund, its more transparent, and you have better corporate governance under a listed regulatory regime. Based in Hong Kong and led by chief executive Duncan Chui, the CPEIH team chose to list in the UK rather than Hong Kong for regulatory reasons. A Chapter 21 listing in Hong Kong limits investment in other companies to 30 percent, whereas a London AIM listing allows us to take control positions, Wong explains. The strategy is not entirely unique, notes Dean Collins, a Singapore-based partner at law firm OMelveny & Myers. A number of Asian funds pursued this route prior to the financial crisis but with mixed results. An AIM or other listing is regarded as easy money but it is often short-term many sophisticated fund managers avoid this route for a number of reasons. For example, it is difficult to build long term institutional relationships with investors who are not tied in for the long run.
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Investors value can also be adversely affected by movements in the markets which are unrelated to the underlying portfolio, Collins says. Because a listed fund generally needs to draw down all its capital at the time of listing yet cannot necessarily utilise it for investments immediately this has a drag on the investors returns, he adds. Wong counters those criticisms, however. A listed fund or investment company does not incur management fees, he says. The management has the same interest as the shareholders, that is, driving strong performance of the company. If the company performs well, the institutional investors should not a have problem investing long-term in it, so it is not impossible to build long term relationships with those institutional investors. Normally the company will raise funds with a pipeline of investments established already, so there should not be much of an early draw down issue. CPEIHs approach to portfolio construction is also somewhat unusual: It makes one or two anchor investments in two core sectors, financial services and TMT. Other investments we make must have synergies with those anchor businesses, Wong says. The firms total net assets as of 30 June this year, according to its interim results statement, stood at $34.7 million, with net cash of $500,000. Wong says CPEIH can raise funding as required for new deals through share issues or by going to the market. One core investment, Fortel, is set to float in Hong Kong early next year, which will mark CPEIHs first full exit. The group has already realised part of its investment in Fortel it sold 5,503 shares in the business in April, raising $3.5 million, and leaving it with a 33.6 percent stake. The firm targets an annual IRR of 30-35 percent, according to its website, but it is unclear what its return on the Fortel deal will be until the IPO is priced. Another of the firms anchor investments is online securities trading platform Enfinium International it is Australia-based, but keen to access the Chinese market. The investment exemplifies CPEIHs re-jigged strategy: earlier this year it amended its investment policy to allow it to invest in businesses operating outside China, but with exposure to the Chinese market. This initiative gave the group greater headroom to find attractive deals, and also allowed them to diversify their portfolio geographically, Wong says.
PEI Media Ltd Document PEI0000020111209e7c90000a

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