China's Oldest Investment Bank CICC Fails to Pay Off for KKR, TPG

Jul 24 2015 | 10:31am ET

(Reuters) - Private equity firms KKR & Co and TPG Capital are making poor returns on their investment in China International Capital Corp (CICC), the country's oldest investment bank that is readying an IPO but has struggled to compete with younger rivals.

CICC, formerly led by Levin Zhu, the 'princeling' son of former Chinese premier Zhu Rongji, filed late on Wednesday for a Hong Kong initial public offering (IPO) that sources have said could raise at least $1 billion.

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The IPO could value CICC at up to $4.1 billion, Reuters calculations show, a 41 percent increase in the five years since investors including KKR and TPG bought minority stakes in the company. The two private equity firms paid a combined $592 million for their stakes.

The return would be classified as disappointing in the private equity industry, where a multiple of two times or more over five years counts as success.

A hit on their CICC investments will be a setback for the private equity firms' ambitions of raising profits in China and luring more investors into their funds.

"CICC was one of the leading firms in China. Their performance in recent years declined because its major business in investment banking declined," said Xingyu Chen, an analyst at Phillip Securities in Shanghai.

Government-controlled CICC was the top underwriter of equity offerings in Hong Kong and China for three years running from 2005-2007, but it has since slipped down the league tables, ranking eighth in 2014, Thomson Reuters data showed.

KKR, TPG and CICC declined to comment.

Morgan Stanley paid $35 million when CICC was founded in 1995 and made nearly 30 times the initial investment when it sold its 34.3 percent stake in 2010 for nearly $1 billion. KKR, TPG, Singapore wealth fund GIC and the insurance arm of Singapore's Oversea-Chinese Banking Corporation bought the stake.

That deal valued CICC at nearly $3 billion, but intense competition from global firms such a Goldman Sachs and homegrown rivals including CITIC Securities and Haitong Securities, coupled with a decline in deals from state-owned enterprises has curbed growth in CICC's value.

CICC had 8.35 billion yuan ($1.34 billion) in total equity at the end of March, according to its prospectus. That will grow to about $2.3 billion with the IPO proceeds. With Hong Kong-listed brokerages trading at an average of 1.5 times book value for 2015, CICC would be valued at $3.5 billion.

Even with a valuation of 1.8 times book, the highest for Hong Kong-listed brokers, CICC would be valued at most at $4.1 billion.

"CICC's competitive advantage now is very small, that's why the valuation, the performance is decreasing," said Phillip Securities' Chen.

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