Chinese pre-IPO GP Cornerstone files for US IPO

Details about the number of shares being offered and the pricing have not yet been disclosed. Cornerstone will use proceeds of the offering to grow its business in China through hiring additional sales, marketing, and fund management personnel, and investing in sales and marketing activities.

The firm was founded in August 2015 to invest in China-based companies that are either publicly listed or seeking to list in the US, particularly in the technology, media and telecom sector. Its deals include pre-IPO investments, IPO subscriptions, PIPE deals, and privatizations, and it also manages a hedge fund focused on Chinese commodity futures.

So far the firm has raised capital on a deal-by-deal basis, primarily from Chinese high net worth individuals (HNWIs). As of September 2017, the firm had more than 800 HNWI investors, representing 97% of its client base. Chinese financial institutions made up the remainder of the investor base, accounting for 23% of the total committed capital.

Cornerstone’s specific investments have not been disclosed, but according to the prospectus they include a waste water purification treatment company, a pet food maker, a mobile game publisher and a video sharing website, among others. As of September 2017, the GP had $262 million in assets under management across five funds. Its first fund, raised in March 2016 to subscribe to the IPO of a call center operator, had been fully exited as of October 2017, generating returns of $13.5 million on an investment of $7.8 million.

The firm reported $6.4 million in revenue and $2.7 million in net profit for the year ended March 2017. Comparable figures for the previous year are not available, but for the six months ended September 2017, the firm recorded revenue of $5.8 million, up from $2.5 million for the same period the previous year. Over the same period, net profit grew from $1.2 million to $2.2 million.

The majority of revenue for the six months ended September 2016 - $1.3 million – came from financial advisory fees, which Cornerstone charges its investors for deal sourcing, due diligence, transaction structuring, and facilitating negotiations. For the later period, this figure dropped to $695,000, representing the smallest source of revenue behind unrealized carried interest, management fees and subscription fees.

Cornerstone noted this swing in the risk factors section of the prospectus, describing its financial advisory business as a one-time service typically provided over a six-month period. The fees it generates are therefore not a long-term contracted source of revenue and should not be taken as predictors of long-term success.

Several Chinese private equity firms listed on the domestic National Equities Exchange and Quotations (NEEQ), also known as the New Third Board, and a number of others tried to follow suit until regulatory requirements were tightened two years ago.

GPs looking to list on the NEEQ must have been in operation for at least five years and completed investing and exited at least one investment fund. Firms also must earn at least 80% of their income from management fees and carried interest, and may not invest more than 20% in each fund as a GP commitment.

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• Topics
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