Private Equity with Chinese Characteristics (Part 2)
If China’s largest state-owned bank controls a private equity fund that raises capital from other state-owned entities, and then uses these funds to make minority investments in state-owned companies, is this private equity, or just a reshuffling of state-owned assets?
No matter the industry—banking, life insurance, energy or electric utility—–China, because of its size, has ended up with some of the world’s largest companies in these fields. The same may soon be true for private equity. Just when major private equity firms like KKR and Blackstone have made their first investments in China, one of the first of the China-born private equity funds is making its first major investment.
Earlier this week, Dow Jones learned that Bohai Industrial Investment Fund Management Co. has agreed to pay approximately 1.5 billion yuan ($200 million) for a less than 20 percent stake in Tianjin Pipe (Group) Corp. It is expected that Bohai Fund and Tianjin Pipe will disclose the deal at a signing ceremony on Friday, November 2.
Tianjin Pipe is China’s largest manufacturer of steel pipe used in oil pipelines and has an estimated 50 percent of the China market.
The Bohai Fund has some very powerful backers in China. The management company of the fund is 53 percent owned by Bank of China and its investment banking arm, and it has raised capital from big state-owned players like China Life Insurance and China Development Bank, as well as the country’s national pension fund.
The Bohai Fund’s position as a Chinese fund gives it significant advantages over its foreign rivals. For one, its capital is raised in yuan so it can make investments using the local currency. Secondly, it does not have to seek approval for its investments from the Ministry of Commerce. At a time when many high profile deals proposed by foreign companies or private equity firms have been delayed or killed because they could not obtain central government approval, this represents a substantial advantage.
Nonetheless, the deal structured with Tianjin Pipe is very similar to those that were recently announced by KKR and Blackstone. The Bohai Fund is making an unleveraged minority investment in Tianjin Pipe, and the local government of Tianjin remains the controlling shareholder. Control-type investments using borrowings which are backed by the assets of the company itself still elude Chinese and foreign private equity funds alike.
While the Bohai Fund’s investment in Tianjin Pipe is being dressed up as private equity, a cynical observer might question what about it is really “private.”
