| June 18
June 18 Baring Asia Private Equity, with $5
billion in assets under management, has a reputation as one of
the savviest investors in China.
But the Hong Kong-based firm is now sitting on an $43
million paper loss from a $57 million investment in New York
Stock Exchange-listed Ambow Education Holdings Ltd., the latest
example of how even the smartest money managers continue to get
trapped in risky Chinese investments.
A Cayman Islands court ordered Ambow into provisional
liquidation earlier this month.
Court-appointed partners of KPMG, the global consultancy,
arrived at Ambow's Beijing offices on June 13 to take over
management and complete an 11-month investigation into
allegations of sham transactions and kickbacks at the schools
and training firm.
Ambow called the allegations "implausible" in a June 3
memorandum filed with the U.S. District Court for the Central
District of California in response to a class-action lawsuit.
The setback for Baring comes amid signs of a renewal of
interest in Chinese firms raising money on U.S. markets
following a deal in May to give U.S. regulators access to
Chinese companies' audit documents.
Baring's aborted bid - it made a $108 million offer for
Ambow in March only to withdraw it 11 days later -- also
highlights the potential hazards of so-called "take private"
deals that have become popular with private equity firms.
Such deals involve delisting troubled and undervalued
Chinese companies that trade in the United States and Singapore,
and then re-listing on exchanges in either Hong Kong or China.
The returns can be enormous. In 2010, Morgan Stanley Asia
Private Equity made more than four times its initial investment
in only 11 months by taking Sihuan Pharmaceutical private in
Singapore and relisting the firm in Hong Kong.
But bankers say the deals are riskier than many investors
"People have the assumption that because the company is
public a lot of people have vetted it before, therefore you
don't need to do the fundamental due diligence that you would
perform on a private company," said Max Chen of Hong Kong-based
private equity firm Primavera Capital.
"That's a false assumption."
Between 2010 and 2012, 70 Chinese companies trading on U.S.
markets were targeted by class-action lawsuits. Altogether they
lost $26.5 billion in market capitalisation, according to
statistics compiled by Cornerstone Research.
The likes of Sino Forest Corp. and Longtop Financial
Technologies Ltd. gained notoriety for fraudulent reporting and
"Greed is a recurring theme," said Hugh Young, managing
director of Aberdeen Asset Management Asia Ltd., which oversees
about $100 billion in assets. Even sophisticated investors "can
be as susceptible to a good sales story as anyone else".
The fallout resulted in a lull over 2011 and 2012, when only
17 Chinese companies listed in the United States - compared with
41 in 2010. But Chinese companies are now trying to sell equity
at Nasdaq and the New York Stock Exchange again.
On June 6, social media platform LightInTheBox raised about
$80 million in New York and its stock soared as much as 32
percent. It was the first Chinese U.S. listing since November,
when YY Inc. raised $97.5 million. Other Chinese firms,
including GDC Technology, will follow, sources told Reuters.
BARING'S AMBOW PROBLEM
Ambow Education was founded by Chief Executive and President
Jin Huang in 2000. By 2007 she had attracted private equity
stalwarts Avenue Capital Group and Macquarie Group to invest in
her tutoring and college entrance test preparation business.
Driven by an aggressive acquisition strategy, revenue
quadrupled over the five years ending in 2011 -- reaching $265.2
million -- and in 2010, Ambow used a Cayman Islands listing
vehicle to raise $107 million on the New York Stock Exchange.
Baring started buying Ambow shares in November 2011 through
Campus Holdings Ltd., a company created with Huang ahead of
their bid to take the firm private.
"Education in China is a sector in which Baring Asia has had
extensive prior investment experience," said Baring's Chief
Executive Jean Eric Salata in a statement at the time. Salata
declined to comment for this article.
Things quickly went wrong. In April 2012, Ambow said it was
unable to file its 2011 annual report on time. Two weeks later,
it announced it was making adjustments to previously released
unaudited financial results. That prompted civil investigations
and half a dozen class-action lawsuits.
Two months later, a former Ambow employee alleged its 52.3
million yuan ($8.52 million) cash and stock purchase of a
Changsha-based school in 2008 was a fraud, with 25 million yuan
returning to the company through the issuance of fake software
invoices, according to the combined civil complaint.
Avenue, the company's biggest outside shareholder, has
accused Huang of blocking the inquiry into those allegations.
Huang did not respond to several requests for comment.
By March 15, when Baring submitted its take-private bid for
the company, a showdown was inevitable.
When Huang refused to step aside at an extraordinary board
meeting, three of Ambow's four independent directors resigned,
including Mark Harris, Asia chief for Avenue Capital, and Daniel
Phillips, an executive director at Macquarie Group.
On April 23, Avenue Capital petitioned the Grand Court of
the Cayman Islands to remedy "the resulting harm that Ambow and
its shareholders have suffered and will continue to suffer if
Dr. Huang's misconduct goes unchecked".
That led to the June 7 order placing the company in
Ambow said in May there was "no basis" for Avenue's claims
and that the petition would be "vigorously contested".
Baring Asia, with a 10 percent stake in the company, and
Macquarie Group, with 7.9 percent, backed Avenue, which holds
Ambow's stock had lost 87 percent of its value in the year
ended March 22, when its shares stopped trading. The company's
market capitalisation, which peaked at $1 billion, is now $70