Banking & Finance

A China private equity play

Money manager PAG eyes $2 billion Hong Kong IPO in choppy markets 


Dealmaker: Shan Weijian

If you look at the firm’s history, we’ve been contrarian, we’ve been innovators, we’ve been kind of West Coast,” Jim Coulter, TPG’s co-founder, once told Bloomberg.

Managing assets worth $114 billion, or about 13% of market leader Blackstone, the 30 year-old private equity firm made its mark by turning around Continental Airlines, and in more recent years, making aggressive bets on Uber, Airbnb and Spotify. Then in the period leading up to Russia’s invasion of Ukraine, US-based TPG managed to raise $1 billion on the New York Stock Exchange, becoming the world’s fifth largest publicly traded buyout firm.

 The war in Ukraine shows few sign of receding, so has this put TPG’s peers off similar IPO efforts? It would seem not given the news that  the Asia-focused alternative investor PAG also wants to come to market. Indeed, an alumnus of TPG is ready to lead that  fundraising. Chinese dealmaker Shan Weijian is reported to be leading PAG’s bid to raise $2 billion from an initial public offering in Hong Kong, giving the firm a valuation of as much as $20 billion (at the top end of the range) more than double that of TPG.

The lofty valuation would be hard to justify were it not for the firm’s track record of robust returns. Its private equity platform, in particular, has achieved an internal rate of return (IRR) of 26% since inception, thanks to an extensive list of investees that have subsequently gone public including Tencent Music Entertainment, Nayuki, RemeGen, and Youran Dairy.

By the end of 2021 PAG had reported over $220 million in distributable returns on its investments, representing annual growth of 39% since 2018.

A bigger payday is set to come. PAG said in its listing prospectus that nearly half of the assets in its close-ended funds are ripe for divestment. A prime candidate would be AirPower, China’s largest independent industrial gas producer, that PAG created last year by merging Yingde Gases and Baosteel Gases. Targeting a valuation of as much as $15 billion, PAG is said to be in talks with Toronto-based Brookfield Asset Management and other bidders, following the expiration of AirPower’s IPO application earlier this year.

Founded in 2010, PAG has its roots in a Japan-focused real estate fund and a multi-strategy hedge fund, established in 1996 and 2002 respectively. While both platforms, led by Jon-Paul Toppino and Chris Gradel, are part of PAG’s core offering, it was Shan’s private equity unit that exposed the fund to high-growth investments in China.

After multiplying its total assets by six times in the last decade, PAG is currently 52% invested in Greater China, followed by 21% in Australia and New Zealand.

Born in Beijing during the Mao era, Shan was one of millions of ‘sent-down’ youths whose formal education was lost to long periods labouring in the countryside (see WiC447 for his experiences in Inner Mongolia’s Gobi Desert). With a strong sense of tenacity, Shan managed to get into a university programme and was one of the first batch of students to study abroad after the Cultural Revolution ended (his doctorate advisor at UC Berkeley was Janet Yellen, now US Treasury Secretary and former Chair of the Federal Reserve). 

After teaching management at the Wharton School of the University of Pennsylvania for six years, Shan took a new role as JPMorgan’s China Chief Representative between 1993 and 1998, and subsequently joined TPG (whose Asian unit was formerly known as Newbridge Capital) as a partner.

One of his biggest achievements was turning around Korea First Bank, which had been nationalised as a result of the Asian financial crisis. The seminal deal – which became the subject of one of Shan’s books – saw Newbridge double the bank’s assets and quadruple the fund’s investment after an exit that saw it sell the lender to Standard Chartered for $1.6 billion six years later in 2005.

Another feat: Shan’s acquisition of a 17% stake in Shenzhen Development Bank in 2004, making Newbridge the first foreign investor to take management control of a Chinese lender.

Five years later, the bank was sold to Ping An Insurance and it was merged with Ping An Bank. Through a share swap with China’s second largest insurer, Newbridge reaped a nearly 16-fold return on its bet on the mid-tier lender.

Shan – who is PAG’s chairman – has achieved success as a dealmaker by bridging cultural divides that exist between China and the West. This skillset has made him one of the region’s most sought-after financiers. Last month Alibaba also appointed him as an independent director on its board. A key task, as HK01, a Hong Kong news outlet points out, is to help the New York-listed giant navigate the treacherous waters arising from the US Holding Foreign Companies Accountable Act – which threatens delisting for companies that don’t open their books to local regulators – while also executing Alibaba’s largest-ever share buyback plan.

PAG’s IPO plan comes at a time when its publicly traded peers have been logging record profits and managing more assets than ever. Blackstone and KKR, in particular, have outperformed the S&P 500 by leaps and bounds in the last two years. Launching an IPO in Hong Kong at present is a bolder act from PAG, however, as the territory’s stock market has been suffering from one of its worst sell-offs in years.

Aside from the expectations of rising US interest rates, PAG’s shares will also have to contend with a Chinese economy dragged down by the resurgence of Covid-19 in many cities, continuing geopolitical tensions surrounding the war in Ukraine and a Chinese property sector that is still reeling from a massive debt load.

PAG has always taken a contrarian approach and one of its new funds is targeting opportunities in China’s distressed real estate sector, however. According to its IPO prospectus, $940 million had been raised for its “China Dislocation Fund” in the four months to February, allowing PAG to close the investment vehicle at two times its original target.

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