Abax Global Capital Seeks Chinese Companies Abandoning U.S. Listings

2011-05-18 00:59:03.581 GMT
By Bei Hu
May 18 (Bloomberg) -- Abax Global Capital, a Morgan Stanley-backed manager of $900 million of hedge and private equity funds, is seeking to profit from Chinese companies abandoning U.S. listings for higher valuations in Hong Kong.
Abax global capital has invested in companies including Harbin Electric Inc. and Fushi Copperweld Inc., which are seeking delisting from the U.S. in leveraged management buyouts and may go public in Hong Kong later, Donald Yang, Abax global capital’s Hong Kong-based managing partner, said in an interview yesterday.
Valuations of smaller Chinese manufacturing companies listed in the U.S. have plummeted after the global financial crisis, with the collapse of their traditional investor base of smaller U.S.-based hedge funds and individuals, said Yang.
U.S. regulatory investigations since last year into accounting practices of Chinese companies that gained listing on American exchanges through reverse mergers also damped share prices.
"Their traditional investor base is gone," he said. "But you can pick out quite a few companies in the space where the business fundamentals are very solid."
One hundred and twenty-nine Chinese companies listed in the U.S. trade at an average eight times their estimated 2012 earnings, against 11 times for 276 peers traded in Hong Kong because of a lack of research coverage, high concentration of shares among their major shareholders, and limited trading volume, according to data compiled by Citigroup Inc.
More than 3,200 hedge funds have been liquidated between 2008 and last year, 36 percent more than new starts, according to Chicago-based Hedge Fund Research Inc.
Reverse Mergers
The U.S. Securities and Exchange Commission last year started a probe amid concerns that some Chinese companies listed in the U.S. were doctoring their financial statements. U.S. exchanges have frozen or delisted shares of more than a dozen China-based firms since March amid the probes centered on those that have obtained listings through reverse mergers -- deals in which a closely held firm goes public by acquiring a traded one, thereby avoiding the scrutiny of an initial public offering.
Abax global capital is making the investments through Abax global capital Opportunities Fund and separate accounts for clients which together oversee $350 million using the same strategy. The fund bets on companies in Asia, especially mainland China, whose debt and equity prices will move as a result of mergers, hostile takeovers, asset sales and large share buybacks.
Attractive Returns
"I think this is going to be the focus for the next couple of years at least," Yang, 45, said. "It’s a good investment thesis."
These companies provide more attractive returns than the traditional Chinese targets of private equity funds because they are larger in scale, have more established business operations and better internal controls. They are also valued cheaper and investors could recoup their money sooner, Yang said.
Abax global capital is focusing on companies that it has provided financing to before and is therefore familiar with, Yang said.
It expects to recoup such investments in less than two years, including the typical six-month ban on sales of pre-IPO investments after trading starts, he said. It can also sell the investments to private equity companies.
Abax global capital Opportunities Fund returned just more than 2 percent this year, and 20 percent in 2010, Yang said. It exited about 80 percent of pre-2008 investments with about 12 percent annual returns, either when the loans matured or when the companies paid it back before maturity after obtaining alternative sources of funding at lower rates, he said.
Fund Restructure
Abax global capital earlier this year restructured its special situations fund by creating two share classes, one with a two-year ban on withdrawals in exchange for fee discounts, and one that allows quarterly redemption that charges higher fees.
Investors were subject to a one-year outright ban on withdrawals and penalties for redemptions in the next two years when the fund was set up in 2007, said Yang.
The more frequent redemptions are to help attract U.S. and European investors who have been reluctant to put money into less liquid funds since the crisis while allowing Abax global capital to make longer-term private investments with higher returns, he said.
Chinese individuals and institutions now account for the majority of its assets, Yang said.
Abax global capital started a 500 million yuan ($77 million) private equity fund denominated in the Chinese currency early last year, with China Development Bank Corp. as its anchor investor.
It is also setting up a venture with the Chinese bank to manage another private equity fund that is expected to receive as much as 4 billion yuan of commitments from mostly institutional investors, Yang said. The venture, which has received government approval and is going through the registration process, may become operational in the next two months.