TPG, the US private equity firm, is poised to cash out of one of the most high-profile and controversial private equity investments made in China, after regulators approved its plan to sell a controlling stake in Shenzhen Development Bank to Chinese financial group Ping An Insurance.
The deal was first announced last June and, after waiting for regulatory approval for nearly a year, TPG is poised to make a profit of more than $2.14bn, a return of more than seven times its original investment.
Ping An said it has received all the necessary approvals to buy TPG’s 16.76 per cent stake in SDB in a deal that will return the bank to full Chinese ownership, nearly six years after TPG became the first foreign investor to take a controlling stake in a Chinese lender.
Ping An already owns about 4.7 per cent of SDB and is planning to buy a further $1.57bn in new shares to give it an eventual stake of up to 30 per cent, replacing TPG as the single largest shareholder in the mid-sized lender.
Ping An said it was still awaiting various regulatory approvals to buy the new SDB shares and this process would “take quite some time”.
Without taking into account any leverage, which would increase the US firm’s actual returns, TPG stands to earn seven times its original investment in SDB of about $300m. TPG acquired its stake in several portions at different prices over several years starting in 2004.
It is understood that about half of TPG’s $300m investment was leveraged, which would make the real return much higher.
The investment has aroused controversy since it was made and has faced regulatory and industry opposition as well as complaints that TPG had bought state assets too cheaply.
However, TPG can claim credit for increasing SDB’s assets by more than three times over the space of six years. It also reduced the bank’s official bad loan ratio from 11.4 per cent when it bought in to about 0.6 per cent by the end of last year.
“The bank was barely profitable five years ago and last year it earned $740m,” said Shan Weijian, the TPG partner who led the investment in SDB.
“We never regarded this as a simple investment but rather as a part of China’s overall banking reform and we’re very happy that after five years this bank has been fundamentally turned around from a weak bank into a very strong bank.”
Financial sector investments by US private equity groups have been hugely controversial throughout the region.
The Japanese government introduced a new tax in 2005, known as the Shinsei tax, that was aimed at discouraging private equity investments after US funds made enormous profits from restructuring Long-Term Credit Bank of Japan into Shinsei Bank.
The Korean government has repeatedly blocked US-based Lone Star from selling a stake it acquired in Korea Exchange Bank in 2003.
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