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No carry

1 July 2014 By Una Galani

Private equity firms have developed a bad habit in Asia. They are investing record amounts in minority stakes in listed companies. Investors dislike such deals because they can buy the shares themselves. History also suggests that giving up control is fraught with risks.

Private equity groups have spent over $3.7 billion on minority stakes in Asia so far this year, according to Thomson One. That’s almost 12 percent of their total spending in the region, and compares with just 3.2 percent for similar investments worldwide.

Pressure to deploy capital and a shortage of conventional targets are driving the trend. Buyout houses are sitting on $138 billion of unspent capital in Asia, according to consultants at Bain & Co. Yet large traditional buyouts are hard to find and controlling families often reluctant to cede control. Foreign ownership limits in industries like banking and media also make it hard to take control.

Private equity investors have some advantages over ordinary ones. When KKR last year agreed to buy a 10 percent stake in Chinese appliance maker Qingdao Haier for around 3.4 billion yuan ($546 million) it paid a discount to the market price and won the right to appoint a board director. In some cases a controlling shareholder may even privately commit to compensate the buyout fund if an investment flounders.

Yet investors have good reasons to be wary of minority stakes. That’s partly because high-profile deals can lose money, as with Blackstone’s 2006 purchase of shares in Deutsche Telekom. Even if a buyout firm makes a profit, however, it’s not clear that it is adding much value. Asia’s relatively poor governance standards make the risks of investing without securing control even greater.

Bain Capital’s investment in GOME is an example of what can go wrong. Shares in the Chinese electronics retailer are just a fraction above the price at which the fund converted bonds into a 10 percent stake four years ago, though interest payments and dividends have enhanced its overall returns. The co-founder is in jail but continues to exert influence over the Hong Kong-listed company.

Bain’s returns may yet improve. But as more money piles into such investments in Asia, the list of failures will pile up too.




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