A new CEO is steering the Bohai investment fund, but disputes over government involvement and management continue.
Yu Ning and Chen Yinghui, Caijing 16 January 2009
Ou Wei’s sudden departure after two years as CEO of China’s first government-sponsored private equity fund, the Bohai Industrial Investment Fund, sparked a lot of internal speculation -- and talk about PE’s direction in China.
Ou took the helm at the launch of the Tianjin-based, 6 billion yuan fund on December 30, 2006. The next year he steered Bohai through its first investments -- worth a combined 2 billion yuan – in China’s largest steel pipe producer, Tianjin Pipe (Group) Corp., and a commercial bank in Chengdu.
But after that, the fund hit the doldrums. And Ou took the heat.
Critics faulted Ou for his bad relationship with shareholders as well as the fund’s lackluster performance. Sympathizers countered that his management style simply failed to win favour from the board and shareholders, and did not match the office culture.
The board named Ou’s replacement December 5, six months after his resignation. The new CEO -- an executive Ou recruited – is former deputy CEO Li Xiangsheng.
Dual Role
As Ou apparently learned the hard way, managing a government-linked PE fund is not a cakewalk. On the one hand, Bohai executives found themselves fending off local government interference. On the other, they had to court official support.
The fund’s investment in Tianjin Pipe – worth 1.5 billion yuan – was hailed by Bohai staff as a “gift” from a local government that wanted PE to play a role in promoting the local economy.
The state-owned pipe maker, whose products are exported to 72 countries and regions, was profitable and confident about going public in mid-2008. Insiders say the company’s main stakeholders were reluctant about transferring their shares to Bohai, but government involvement encouraged enough smaller shareholders to give in.
“It is a case of an enterprise helping out a PE, not the PE creating value for the enterprise,” said a Bohai insider who refused to be identified.
Bohai made no investments in 2008. Before resigning, Ou convinced the fund’s Investment Evaluation Commission to abandon several projects, calling them overrated. Shareholders agreed.
PE Experiment?
Bohai’s founders received special permission from the State Council to begin the project.
Bohai was designed to provide easy access to capital for small businesses and firms engaged in the modern manufacturing and high-technology fields. It was hailed as a new fund-raising channel to supplement bank loans and IPOs for cash-strapped companies.
At Bohai’s launch, former Tianjin mayor Dai Xianglong told reporters the fund would be included in the scheme of comprehensive reforms for a city financial development zone called Binhai New Area. Plans called for the fund to reach 20 billion yuan in 15 years.
Bohai started with about 6 billion yuan. Major sponsors included the National Council for Social Security Fund of China, Bank of China (BOC) International (China) Ltd., China Development Bank, Postal Savings Bank of China, China Life Insurance Group, and Jinneng Investment Shareholding Co. Ltd.
Another sponsor is the Bohai Industrial Investment Fund Management Co., which was created with registered capital of 200 million yuan to manage the fund. The manager’s shareholders include BOC International, with 48 percent, and Tianjin-based Bus Company of TEDA Investment Holding Co., with 22 percent. Other major sponsors each hold a 5 percent stake.
Money Squabbles
The fund manager was structured as an investment management company rather than as a limited partnership, which is a common set-up in the West for PE managers. Its structure might have been different had not the management company been established six months before the birth of China’s Enterprise Partnership Law.
But as a result, lines of accountability at Bohai can seem fuzzy. Investors also hold stakes in the fund manager. And some observers say the fund is merely an experiment sponsored by the government.
“The government acted as a coordinator of the parties, leaving us no choice” regarding who does what, said an investor source. However, he added that “without the government’s coordination efforts, we would have left the negotiation table a long time ago.”
Supporters of the management company call the structure an acceptable, although not the best, solution considering the state of the market when the fund began.
“The investors had been extremely concerned about the capabilities of management,” said a China Development Bank official on condition of anonymity. “They wanted to be in the know.”
The bank official added that investor participation in management provided an added benefit: a platform for coordination.
The management team, however, has cited communication problems with investors. They’ve also criticized the investors for meddling.
An unnamed board member told Caijing that investors stopped being satisfied with semi-annual briefings on investment conditions and started demanding quarterly reports. They were told that more frequent reports were necessary to coordinate all parties and allow closer supervision by high-level government authorities.
Compensation disputes dogged Bohai as well.
PE fund managers usually collect fees equal to between 1.5 and 2.5 percent of the capital under management, according to Wilbur Ross, chairman of the U.S.-based International Textile Group.
The Bohai manager and investors agreed to an annual 1.65 percent management fee, or nearly 100 million yuan. They also agreed the management company’s shareholders would pocket all fees while senior executives, because they were hired after the fund’s first-phase placement investment, would only receive bonuses and carried interests, a percentage of net profit.
The structure led to a squabble over executive pay. In early 2008, executives asked for their promised bonuses based on the fact that the 2007 deals exceeded the board’s 1 billion yuan investment target. But the shareholders balked, saying more time was needed to test the executives.
Eventually, the shareholders agreed to pay the executives, but only half what they expected, based on industry standards. “I think they (shareholders) just don’t like us,” said one executive.
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Crests, Troughs for China’s First PE Wave
A new CEO is steering the Bohai investment fund, but disputes over government involvement and management continue.
Yu Ning and Chen Yinghui, Caijing
16 January 2009
Ou Wei’s sudden departure after two years as CEO of China’s first government-sponsored private equity fund, the Bohai Industrial Investment Fund, sparked a lot of internal speculation -- and talk about PE’s direction in China.
Ou took the helm at the launch of the Tianjin-based, 6 billion yuan fund on December 30, 2006. The next year he steered Bohai through its first investments -- worth a combined 2 billion yuan – in China’s largest steel pipe producer, Tianjin Pipe (Group) Corp., and a commercial bank in Chengdu.
But after that, the fund hit the doldrums. And Ou took the heat.
Critics faulted Ou for his bad relationship with shareholders as well as the fund’s lackluster performance. Sympathizers countered that his management style simply failed to win favour from the board and shareholders, and did not match the office culture.
The board named Ou’s replacement December 5, six months after his resignation. The new CEO -- an executive Ou recruited – is former deputy CEO Li Xiangsheng.
Dual Role
As Ou apparently learned the hard way, managing a government-linked PE fund is not a cakewalk. On the one hand, Bohai executives found themselves fending off local government interference. On the other, they had to court official support.
The fund’s investment in Tianjin Pipe – worth 1.5 billion yuan – was hailed by Bohai staff as a “gift” from a local government that wanted PE to play a role in promoting the local economy.
The state-owned pipe maker, whose products are exported to 72 countries and regions, was profitable and confident about going public in mid-2008. Insiders say the company’s main stakeholders were reluctant about transferring their shares to Bohai, but government involvement encouraged enough smaller shareholders to give in.
“It is a case of an enterprise helping out a PE, not the PE creating value for the enterprise,” said a Bohai insider who refused to be identified.
Bohai made no investments in 2008. Before resigning, Ou convinced the fund’s Investment Evaluation Commission to abandon several projects, calling them overrated. Shareholders agreed.
PE Experiment?
Bohai’s founders received special permission from the State Council to begin the project.
Bohai was designed to provide easy access to capital for small businesses and firms engaged in the modern manufacturing and high-technology fields. It was hailed as a new fund-raising channel to supplement bank loans and IPOs for cash-strapped companies.
At Bohai’s launch, former Tianjin mayor Dai Xianglong told reporters the fund would be included in the scheme of comprehensive reforms for a city financial development zone called Binhai New Area. Plans called for the fund to reach 20 billion yuan in 15 years.
Bohai started with about 6 billion yuan. Major sponsors included the National Council for Social Security Fund of China, Bank of China (BOC) International (China) Ltd., China Development Bank, Postal Savings Bank of China, China Life Insurance Group, and Jinneng Investment Shareholding Co. Ltd.
Another sponsor is the Bohai Industrial Investment Fund Management Co., which was created with registered capital of 200 million yuan to manage the fund. The manager’s shareholders include BOC International, with 48 percent, and Tianjin-based Bus Company of TEDA Investment Holding Co., with 22 percent. Other major sponsors each hold a 5 percent stake.
Money Squabbles
The fund manager was structured as an investment management company rather than as a limited partnership, which is a common set-up in the West for PE managers. Its structure might have been different had not the management company been established six months before the birth of China’s Enterprise Partnership Law.
But as a result, lines of accountability at Bohai can seem fuzzy. Investors also hold stakes in the fund manager. And some observers say the fund is merely an experiment sponsored by the government.
“The government acted as a coordinator of the parties, leaving us no choice” regarding who does what, said an investor source. However, he added that “without the government’s coordination efforts, we would have left the negotiation table a long time ago.”
Supporters of the management company call the structure an acceptable, although not the best, solution considering the state of the market when the fund began.
“The investors had been extremely concerned about the capabilities of management,” said a China Development Bank official on condition of anonymity. “They wanted to be in the know.”
The bank official added that investor participation in management provided an added benefit: a platform for coordination.
The management team, however, has cited communication problems with investors. They’ve also criticized the investors for meddling.
An unnamed board member told Caijing that investors stopped being satisfied with semi-annual briefings on investment conditions and started demanding quarterly reports. They were told that more frequent reports were necessary to coordinate all parties and allow closer supervision by high-level government authorities.
Compensation disputes dogged Bohai as well.
PE fund managers usually collect fees equal to between 1.5 and 2.5 percent of the capital under management, according to Wilbur Ross, chairman of the U.S.-based International Textile Group.
The Bohai manager and investors agreed to an annual 1.65 percent management fee, or nearly 100 million yuan. They also agreed the management company’s shareholders would pocket all fees while senior executives, because they were hired after the fund’s first-phase placement investment, would only receive bonuses and carried interests, a percentage of net profit.
The structure led to a squabble over executive pay. In early 2008, executives asked for their promised bonuses based on the fact that the 2007 deals exceeded the board’s 1 billion yuan investment target. But the shareholders balked, saying more time was needed to test the executives.
Eventually, the shareholders agreed to pay the executives, but only half what they expected, based on industry standards. “I think they (shareholders) just don’t like us,” said one executive.
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