Caixin
Apr 09, 2018 05:42 AM
FINANCE

Regulators Take Aim at Maverick PE Fund

Regulators have launched several inspections on Jiuding and Jiuzhou Securities since the second half of 2017. Photo: VCG
Regulators have launched several inspections on Jiuding and Jiuzhou Securities since the second half of 2017. Photo: VCG

Another high-flying private financial company has been placed in the regulatory spotlight amid China’s sweeping campaign to crack down on market irregularities.

Jiuding Capital Co., a Beijing-based private equity (PE) firm, announced in a regulatory filing in late March that it was under investigation by the China Securities Regulatory Commission for possibly violating securities laws.

The news sparked a 75% decline of Jiuding’s shares in two days right after its trading resumed from a suspension since June 2015 due to acquisition and restructuring deals.

Jiuding has been a source of controversies in China’s PE sector over its 11-year history.

The company has drawn attention for its fast growth fueled by savvy investments targeting rising companies. But it has also sparked criticism from competitors for its maverick and aggressive business strategy, dubbed by the industry as an “assembly line" investment model, which pursues quick returns by investing in pre-IPO firms and then swiftly exiting after the initial public offering (IPO).

Regardless of cheers and doubts, Jiuding has been on its growth track. In 2014, it became China’s first PE firm to list on the National Equities Exchange and Quotation (NEEQ), the country largest over-the-counter stock trading platform. The next year, its market capitalization exceeded 100 billion yuan ($15.9 billion), the most valuable in the NEEQ market.

Jiuding has stepped up mergers and acquisitions in recent years to obtain financial licenses and expand its business reach to securities, insurance, mutual fund and internet finance.

The company posted sound performance as of September 2017. According to the company’s data, Jiuding had total assets of 96.2 billion yuan by the end of September with 63.5 billion yuan in debt. The company’s main assets include Hong Kong-based FTLife Insurance Co., Beijing-based brokerage Jiuzhou Securities, Shanghai-listed Kunwu Jiuding Investment Holding and 20 billion yuan worth of other assets. In 2017, Jiuding reported 10.9 billion yuan in revenue and 2.6 billion yuan in net profit.

But an industry expert said Jiuding’s upbeat financial books are supported by high financial leverage.

Caixin learned that over 70% of Jiuding’s NEEQ-listed shares and 97% of Kunwu Jiuding Investment’s shares have been pledged for loans. In addition, the company raised 10 billion yuan in a 2015 private placement designed for expanding its PE business, but most of the money raised has been used to repay loans.

Fueling concerns that Jiuding might be hit by financial woes are recent reports about its delayed payments to staff. Several former Jiuding employees told Caixin that the company owes bonuses and wages worth over 100 million of yuan.

In January, Jiuding sold its stake in Jiuzhou Securities to state-owned Shandong Hi-speed Group for 10.8 billion yuan. A person close to Jiuding said the sale was made to ease Jiuding’s debt load.

As regulators zoomed in on Jiuding’s business practices, its chairman, Wu Gang, tried to downplay the investigation at a meeting with investors on Mar.27, likening it to a routine check.

But Caixin has learned that the investigation could be targeting more serious wrongdoing, including alleged market manipulation, illicit practices in previous share placement deals and fundraising from public investors.

Shrewd investor

Established by Wu and partners in 2007, Jiuding’s business was blessed by a strong wave of IPOs in the domestic market in late 2000s, which offered a good cash-out route for PE investors.

As a former CSRC official, Wu’s experiences and resources accumulated during his career in the regulatory body also helped Jiuding approach and secure deals with many rising companies touting IPO plans, sources close to Jiuding said.

“Many people asked at that time whether Jiuding is a subsidiary of the CSRC,” said one official at the commission.

The quick rise of Jiuding stirred up the industry. It deployed employees nationwide to find companies they judged to be qualified for public listings and used any means to achieve success with their investments — with assembly-line speed.

Funds in China usually offload an investment within five to seven years. According to Jiuding records, the firm's fastest injection-to-listing project was completed in about one year.

Such strategy helped Jiuding quickly grow as China’s top PE fund specialized in pre-IPO investments. But it also sparked industry criticisms blaming it for bending industry rules and hurting the market.

Jiuding’s IPO-targeted investment model was under pressure since 2012 when the securities regulator dramatically slowed down, and later suspended, its review on IPO applications amid the two-year-long bear market.

After the market recovered in 2014, Jiuding surprised the market to become China’s first PE firm to list at the NEEQ through a 3.5 billion yuan IPO. The company has since geared up its expansion, paying billions of yuan in deals to acquire financial business assets, including Jiuzhou Securities and FTLife Insurance. It also tapped the burgeoning internet financial market by setting up peer-to-peer lending sites and an online bank.

Sources close to the company told Caixin that since 2015 Jiuding paid heavily to hire former CSRC officials, including Wu’s previous co-workers, to join the company in its push to expand its business.

Under scrutiny

The CSRC hasn’t specified the investigation on Jiuding, but a source close to the commission said the regulator has had concrete clues and evidence in hand. “It is totally different from a routine check,” the source said.

Caixin learned that regulators have launched several inspections on Jiuding and Jiuzhou Securities since the second half of 2017 and ordered the companies to suspend some businesses.

Sources said wrongdoing in Jiuding and its subsidiaries were initially uncovered by government auditors, involving alleged market manipulation, misconduct in previous share placements and illicit practices in fundraising.

Jiuding has previously been questioned for its use of the 10 billion yuan fund raised in a 2015 private placement. According to the company’s prospectus for the placement, Jiuding planned to use the money mainly to expand its PE business while smaller portions would be used to set up a wealth-management venture and supplement working capital.

Company records showed that as of June 30, 2017, Jiuding only invested 1.2 billion yuan of the funds it raised in its PE business. Meanwhile, about 6.6 billion yuan was used to repay loans and finance acquisitions.

In 2016, Western Securities Co., which supervised Jiuding’s 2015 placement, launched an investigation into whether Jiuding violated rules regarding the use of the funds. The brokerage later concluded that Jiuding had made no violation as it had followed the required procedures to change the purpose of the funds.

Regulators are also scrutinizing Jiuding’s fundraising practices with an asset management firm called Miduo Asset Management Co., Caixin has learned.

According to Jiuding’s statement on March 27, the company pledged 41 million shares to Miduo for loans. Jiuding said in the statement that Miduo is not an affiliated party of Jiuding. In February 2017, Kunwu Jiuding Investment also said it pledged 8.2 million shares to Miduo for loans.

Business registration records provided by information portal Tianyancha showed that the second largest shareholder of Miduo’s parent is Huang Xiaojie, one of Jiuding’s founders.

Records from the Asset Management Association showed that Miduo registered as a private fund manager in 2015 and filed 106 financial products worth more than 6 billion yuan.

A source close to Midou told Caixin that the company currently manages funds worth 1.5 billion yuan from retail investors with maturities of six months to one year. The pledged shares from Jiuding are underlying assets of most of the investment plans.

Caixin has learned from sources that Miduo and Jiuding had agreements in which Jiuding agreed to buy back pledged shares.

Several industry sources told Caixin that the structure of Miduo’s products made them typical examples of debts that are disguised as equity investments. This practice has been targeted in a regulatory crackdown because it serves as a risky lending channel outside the formal banking system and exposes retail investors to excessive risks.

Sources said Jiuding is also suspected for working with Midou to issue new asset management products to raise money to repay maturing products in a bid to extend loans.

“Raising short-term money to make long-term investment creates fatal risks for PE firms. The crisis of misalignment will break out sooner or later,” a PE executive said.

Contact reporter Han Wei (weihan@caixin.com)

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