Ambow setback teaches Baring a lesson in China investing

By Matthew Miller and Stephen Aldred, Reuters

(Reuters) – Baring Asia Private Equity, with $5 billion in assets under management, has a reputation as one of the savviest investors in China.

But the Hong Kong-based firm is now sitting on an $43 million paper loss from a $57 million investment in New York Stock Exchange-listed Ambow Education Holdings Ltd., the latest example of how even the smartest money managers continue to get trapped in risky Chinese investments.

A Cayman Islands court ordered Ambow into provisional liquidation earlier this month.

Court-appointed partners of KPMG, the global consultancy, arrived at Ambow’s Beijing offices on June 13 to take over management and complete an 11-month investigation into allegations of sham transactions and kickbacks at the schools and training firm.

Ambow called the allegations “implausible” in a June 3 memorandum filed with the U.S. District Court for the Central District of California in response to a class-action lawsuit.

The setback for Baring comes amid signs of a renewal of interest in Chinese firms raising money on U.S. markets following a deal in May to give U.S. regulators access to Chinese companies’ audit documents.

Baring’s aborted bid – it made a $108 million offer for Ambow in March only to withdraw it 11 days later — also highlights the potential hazards of so-called “take private” deals that have become popular with private equity firms.

Such deals involve delisting troubled and undervalued Chinese companies that trade in the United States and Singapore, and then re-listing on exchanges in either Hong Kong or China.

The returns can be enormous. In 2010, Morgan Stanley Asia Private Equity made more than four times its initial investment in only 11 months by taking Sihuan Pharmaceutical private in Singapore and relisting the firm in Hong Kong.

But bankers say the deals are riskier than many investors assume.

“People have the assumption that because the company is public a lot of people have vetted it before, therefore you don’t need to do the fundamental due diligence that you would perform on a private company,” said Max Chen of Hong Kong-based private equity firm Primavera Capital .

“That’s a false assumption.”

Between 2010 and 2012, 70 Chinese companies trading on U.S. markets were targeted by class-action lawsuits. Altogether they lost $26.5 billion in market capitalisation, according to statistics compiled by Cornerstone Research.

The likes of Sino Forest Corp. and Longtop Financial Technologies Ltd. gained notoriety for fraudulent reporting and asset stripping.

“Greed is a recurring theme,” said Hugh Young, managing director of Aberdeen Asset Management Asia Ltd., which oversees about $100 billion in assets. Even sophisticated investors “can be as susceptible to a good sales story as anyone else”.

The fallout resulted in a lull over 2011 and 2012, when only 17 Chinese companies listed in the United States – compared with 41 in 2010. But Chinese companies are now trying to sell equity at Nasdaq and the New York Stock Exchange again.

On June 6, social media platform LightInTheBox raised about $80 million in New York and its stock soared as much as 32 percent. It was the first Chinese U.S. listing since November, when YY Inc. raised $97.5 million. Other Chinese firms, including GDC Technology, will follow, sources told Reuters.

BARING’S AMBOW PROBLEM

Ambow Education was founded by Chief Executive and President Jin Huang in 2000. By 2007 she had attracted private equity stalwarts Avenue Capital Group and Macquarie Group to invest in her tutoring and college entrance test preparation business.

Driven by an aggressive acquisition strategy, revenue quadrupled over the five years ending in 2011 — reaching $265.2 million — and in 2010, Ambow used a Cayman Islands listing vehicle to raise $107 million on the New York Stock Exchange.

Baring started buying Ambow shares in November 2011 through Campus Holdings Ltd., a company created with Huang ahead of their bid to take the firm private.

“Education in China is a sector in which Baring Asia has had extensive prior investment experience,” said Baring’s Chief Executive Jean Eric Salata in a statement at the time. Salata declined to comment for this article.

Things quickly went wrong. In April 2012, Ambow said it was unable to file its 2011 annual report on time. Two weeks later, it announced it was making adjustments to previously released unaudited financial results. That prompted civil investigations and half a dozen class-action lawsuits.

Two months later, a former Ambow employee alleged its 52.3 million yuan ($8.52 million) cash and stock purchase of a Changsha-based school in 2008 was a fraud, with 25 million yuan returning to the company through the issuance of fake software invoices, according to the combined civil complaint

Avenue, the company’s biggest outside shareholder, has accused Huang of blocking the inquiry into those allegations.

Huang did not respond to several requests for comment.

By March 15, when Baring submitted its take-private bid for the company, a showdown was inevitable.

When Huang refused to step aside at an extraordinary board meeting, three of Ambow’s four independent directors resigned, including Mark Harris, Asia chief for Avenue Capital, and Daniel Phillips, an executive director at Macquarie Group.

On April 23, Avenue Capital petitioned the Grand Court of the Cayman Islands to remedy “the resulting harm that Ambow and its shareholders have suffered and will continue to suffer if Dr. Huang’s misconduct goes unchecked”.

That led to the June 7 order placing the company in provisional liquidation.

Ambow said in May there was “no basis” for Avenue’s claims and that the petition would be “vigorously contested”.

Baring Asia, with a 10 percent stake in the company, and Macquarie Group, with 7.9 percent, backed Avenue, which holds 14.6 percent.

Ambow’s stock had lost 87 percent of its value in the year ended March 22, when its shares stopped trading. The company’s market capitalisation, which peaked at $1 billion, is now $70 million.

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