Caveat emptor

The Blackstone Group, Capital International and their co-investors had calmly committed $600 million in pre-IPO financing for mainland Chinese vegetable markets operator Dili Group Holdings Co. Ltd. Meanwhile, Morgan Stanley, General Atlantic, Goldman, Everstone, and Norwest committed $425 million to India-focused power play Asian Genco, to be followed soon after by Temasek Holdings reaching a $200 million deal in its protracted negotiations with GMR Energy. It was all unfolding so smoothly and seamlessly.

Now was the time to invest, GPs fresh from the fundraising trail declared. With Asia Pacific leading the world out of the depths of the U-, V-, L- or W-shaped slump, tolerable valuations, adequate leverage, and above all, buoyant growth prospects made this an excellent environment to do deals. Capital just raised or still in the dry-powder barrels could be safely put to work in the certain confidence of riding the region’s strong growth story out of recession.

Yet new reports of problem deals come as an all-too-timely reminder that Asian risk has not gone away. The unfolding debacle at Hunan Taizinai Group looks alarming similar to the now-notorious Asia Aluminum outcome, with inadequately-protected Western minority investors hostage to an over-ambitious China management in the boom years, and equally hostage to a local government-led liquidation process after the bust.

Likewise, Goldman Sachs’s failed shot at Malaysia’s KNM Group brought to grief the country’s potential biggest-ever private equity deal, in a situation where even the company’s own head and its biggest shareholder could not get the business away from the board. And Carlyle’s ongoing difficulties with Taiwan’s regulators over its Taiwan Mobile/Kbro deal shows how many booby-traps may lie in wait for the region’s investors, especially when they go into situations and try solutions that have not been hazarded before.

Even the successes are cause for concern. Temasek’s headline result with GMR covers a highly conditional structure tied to specific milestones, papering over the fact that Singapore’s major SWF was unable to reach a definitive agreement on pricing with the vendors. And some of the other deals closed recently bear all the distinguishing marks of past problem situations: significant minority investments with unclear rights and entitlements, seeking to ride a growth story, with GPs talking up the value of trust and close alignment with the management team.

Just as troubling, sources on the fundraising side report that international LP interest is swinging even more decisively, and undiscriminatingly, toward China. The PRC, they say, now accounts for around 75%, directly or indirectly, of expressed interest in Asia Pacific commitments. Exactly the market that produced Asia Aluminum, and now Taizinai. And are GPs entrusted to put that level of interest, and volume of capital, to work, really going to maintain their investment standards and due diligence at the same levels regardless?

This is still an emerging market. And you can still lose your shirt. Let the investor beware.

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• Topics
• Investments
• Performance
• Goldman Sachs
• Temasek Holdings
• The Blackstone Group
• General Atlantic
• Morgan Stanley