Tuesday, October 30, 2007
Private-Equity Pioneer In China Plans First Deal
By RICK CAREW
October 30, 2007
BEIJING -- China's nascent private-equity industry is advancing in its ambition to compete with global players as the first of a new breed of homegrown funds seals its first deal.
Bohai Industrial Investment Fund Management Co., which is controlled by Bank of China Ltd., agreed to pay about 1.5 billion yuan ($200 million) for a stake of less than 20% in Tianjin Pipe (Group) Corp., two people familiar with the situation said.
[The Other Olympics]Bohai Fund and Tianjin Pipe plan to disclose the deal at a signing ceremony Friday in the northeastern port city of Tianjin, where both firms are based.
China's government is nurturing a domestic private-equity industry it hopes will be able to compete with global private-equity firms like Carlyle Group and TPG, which have dominated the private-equity scene in China so far.
Backed by Chinese investors and a war chest of local currency, domestic private-equity firms face fewer bureaucratic obstacles in getting purchases approved than foreign competitors do.
The sizable investment in Tianjin Pipe, China's biggest maker of steel pipes for building oil pipelines, is an ambitious start for Bohai Fund. The deal ranks among the biggest in mainland China this year. Bohai Fund has stated a preference for deals of at least 500 million yuan.
Nonfinancial-sector private-equity investment in China so far this year has totaled just $1.6 billion, a tiny fraction of the deal volume in the U.S. The biggest investment signed this year is Blackstone Group LP's agreement to pay $600 million for a 20% stake in state-owned chemical producer China National BlueStar (Group) Corp.
Even for foreign players, private-equity deals in China are usually an all-cash affair rather than the leveraged buyouts common in the U.S. and other developed economies. That is partly because China has no real system in which private-equity buyers can use a company's assets as collateral, and that deters banks from taking the risk of arranging financing.
Last year, Chinese government regulators gave permission for Bohai Fund's creation to start building a local private-equity industry after banning banks and brokerage firms from such direct-investment deals. The management company, which is 53% owned by Bank of China and its investment-banking arm, BOC International Holdings Ltd., closed its first fund at the end of last year, raising 6.1 billion yuan.
Bohai Fund is different from foreign funds because it invests in yuan rather than in U.S. dollars. Unlike foreign funds, Bohai doesn't need approval from the Ministry of Commerce, which has delayed or scuttled several private-equity deals. Bohai Fund's capital comes from big state-owned players like China Life Insurance Co., China Development Bank and the country's national pension fund.
"We know China better," Simon Ting, BOC International's private-equity head, said in an interview earlier this year. "The Bohai Fund, being a yuan fund, can do lots of business that foreign firms can't touch."
A person close to the Tianjin Pipe deal said he believed there were "many other interested parties" looking to pair up with Tianjin Pipe, but he didn't provide names.
A number of Chinese institutions are taking aim at the potential of private equity in China, looking to join Bohai Fund. In September, China's securities regulator cleared the country's two strongest brokerage firms, China International Capital Corp. and Citic Securities Co., to start making private-equity-style direct investments.
Signals from Beijing that it is keen to build a private-equity industry are drawing more of the country's deal makers to try their hands at starting up funds. For example, Fang Fenglei, Goldman Sachs Group Inc.'s partner in China, is taking a smaller role in the China joint venture he helped start with Goldman to pursue a private-equity fund.
Au Ngai, the Beijing-born chief executive of Bohai Fund, left TPG last year to start up the fund. He helped engineer TPG's landmark 2004 deal to take control of Shenzhen Development Bank, which remains the only Chinese bank controlled by foreigners.
For its first investment, Bohai Fund didn't look far from home. Tianjin Pipe, controlled by the local Tianjin government, produces about a million tons of oil pipe a year, with around 50% of Chinese market share. China's rapidly growing thirst for oil and natural gas has the nation's energy companies laying thousands of kilometers of pipelines to tap central Asia's vast reserves and pump crude oil and refined products around the country.
For example, PetroChina Co., the listed unit of China's largest oil-and-gas producer, said last week it plans to invest over $13 billion to link natural-gas reserves in central Asia's Turkmenistan and Kazakhstan to China's coastal cities of Shanghai and Guangzhou.
Tianjin Pipe's two biggest shareholders are local-government investment firms, with 10% held by China's four asset-management companies, which were created to clear bad debt from the country's state banks. The company recorded a net profit for 2006 of 1.38 billion yuan, up 46% from its 2005 net profit of 947 million yuan. At the end of last year, Tianjin Pipe had total assets of 21.14 billion yuan and 15,828 employees.