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Peter Fuhrman
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Chairman, Founder and Chief Executive Officer at China First Capital (www.chinafirstcapital.com) , a China-based international investment bank and advisory firm for capital markets and M&A transactions. China First Capital was established in 2007 and has its headquarters in Shenzhen, China.... More
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China Private Equity, by China First Capital
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  • China First Capital Interview: Cashing In And Cashing Out — China Law & Practice

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    Peter Fuhrman, CEO of China First Capital, explains how the country's private equity market has struggled with profit returns and the importance of diversified exit strategies. He also predicts the rise of new funds to execute high-yield deals

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    Date: 05 May 2015

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    What is China First Capital?

    China First Capital is an investment bank and advisory firm with a focus on Greater China. Our business is helping larger Chinese companies, along with a select group of Fortune 500 companies, sustain and enlarge market leadership in the country, by raising capital and advising on strategic M&A. Like our clients, we operate in an opportunity-rich environment. Though realistic about the many challenges China faces as its economy and society evolve, we are as a firm fully convinced there is no better market than China to build businesses of enduring value. China still has so much going for it, with so much more growth and positive change ahead. As someone who first came to China in 1981 as a graduate student, my optimism is perhaps understandable. The positive changes this country has undergone during those years have surpassed by orders of magnitude anything I might have imagined possible.

    After a rather long career in the US and Europe, including a stint as CEO of a California venture capital company as well as a venture-backed enterprise software company, I came back to China in 2008 and established China First Capital with a headquarters in Shenzhen, a place I like to think of as the California of China. It has the same mainly immigrant population and, like the Silicon Valley, is home to many leading private sector high-tech companies.

    What is happening in China's private equity (NYSE:PE) market?

    Back in 2008, China's financial markets, the domestic PE industry, were far less developed. It was, we now can see, a honeymoon period. Hundreds of new PE firms were formed, while the big global players like Blackstone, Carlyle, TPG and KKR all built big new operations in China and raised tons of new money to invest there. From a standing start a decade ago, China PE grew into a colossus, the second-largest PE market in the world. But, it also, almost as quickly, became one of the more troubled. The plans to make quick money investing in Chinese companies right ahead of their planned IPO worked brilliantly for a brief time, then fell apart, as first the US, then Hong Kong and finally China's own domestic stock exchanges shut the doors to Chinese companies. Things have since improved. IPOs for Chinese companies are back in all three markets. But PE firms are still sitting on thousands of unexited investments. The inevitable result, PE in China has had a disappointing record in the category that ultimately matters most: returning profits to limited partners (LPs).

    Read complete interview

    May 07 9:13 AM | Link | Comment!
  • Foreign Investors Unfazed By Kaisa's Default –South China Morning Post

    Foreign investors unfazed by Kaisa's default

     

    No increase in costs as mainland developers Jingrui and Landsea tap bond market

    PUBLISHED : Saturday, 25 April, 2015, 12:38am

     

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    Kaisa Group Holdings' debt default has not affected other developers in selling bonds. Photo: Reuters

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    China's first default by a developer on offshore debt has not added to costs for fellow borrowers, with moves to relax policy countering any such concerns if two senior note issuances this week are any indication.

    Jingrui Holdings and Landsea Green Properties came to the market this week, hot on the heels of Monday's failure by Kaisa Group Holdings to repay US$51.6 million in interest on two notes, maturing in 2017 and 2018.

    Jingrui priced its three-year US$150 million senior notes at 13.25 per cent, slightly lower than the 13.625 per cent it paid in August last year on the same amount of five-year senior notes.

    "Investors asked more questions about financial details and wanted to know more about our senior management team," Shanghai-based Jingrui said on Friday.

    Landsea issued US$100 million of senior notes due in 2018 at 9.5 per cent.

    Both firms said the price was no higher than last year and terms remained similar, bucking concerns Kaisa's default would see mainland developers' offshore fundraising costs shoot up and demand from foreign debt investors for more protection because they would be regarded as inferior to onshore creditors.

    Analysts said that as the mainland authorities relaxed refinancing channels to support the struggling real estate industry and rev up economic growth, developers could turn to the domestic market if pricing offshore became more expensive.

    Policy easing is fuelling a strong rally in the mainland and Hong Kong stock markets, making it possible for developers to raise funds and cut debt ratios by issuing new shares.

    Meanwhile, ample global liquidity was driving a need for offshore funds to keep mainland developers' high-yield debts in their portfolios, analysts said, despite a tug of war between Kaisa and its offshore bond holders.

    Kaisa's trouble started when the Shenzhen government banned the sale of its projects.

    The market was positively surprised by the return of its founder and chairman Kwok Ying-shing to the company last week.

    His departure in December last year and the company's near-default on interest payments in January shocked investors and froze the offshore bond market for a few weeks.

    "Kaisa is far from the first Chinese real estate developer to run into problems like these," said Peter Fuhrman, the founder of investment advisory firm China First Capital.

    "And yet, again, none of this, the 'politico-existential' risk many real estate development companies face in China, seems to have made much of an imprint on the minds of international investors who lined up to buy the 8 per cent bonds originally," he said in a report on Tuesday.

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    http://www.scmp.com/business/markets/article/1775793/foreign-investors-unfazed-kaisas-default

    May 04 9:47 AM | Link | Comment!
  • China's Loan Shark Economy -- Nikkei Asian Review

    (click to enlarge)

    China's loan shark economy

    By Peter Fuhrman

    What's ailing China? Explanations aren't hard to come by: slowing growth, bloated and inefficient state-owned enterprises, and a ferocious anti-corruption campaign that seems to take precedence over needed economic reforms.

    A clerk counts yuan notes at a bank branch in Huaibei in central China's Anhui Province, on Jan. 22.© AP

    Yet for all that, there is probably no bigger, more detrimental, disruptive or overlooked problem in China's economy than the high cost of borrowing money. Real interest rates on collateralized loans for most companies, especially in the private sector where most of the best Chinese companies can be found, are rarely below 10%. They are usually at least 15% and are not uncommonly over 20%. Nowhere else are so many good companies diced up for chum and fed to the loan sharks.

    Logic would suggest that the high rates price in some of the world's highest loan default rates. This is not the case. The official percentage of bad loans in the Chinese banking sector is 1%, less than half the rate in the U.S., Japan or Germany, all countries incidentally where companies can borrow money for 2-4% a year.

    You could be forgiven for thinking that China is a place where lenders are drowning in a sea of bad credit. After all, major English-language business publications are replete with articles suggesting that the banking system in China is in the early days of a bad-loan crisis of earth-shattering proportions. A few Chinese companies borrowing money overseas, including Hong Kong-listed property developer Kaisa Group, have come near default or restructured their debts. But overall, Chinese borrowers pay back loans in full and on time.

    Combine sky-high real interest rates with near-zero defaults and what you get in China is now probably the single most profitable place on a risk-adjusted basis to lend money in the world. Also one of the most exclusive: the lending and the sometimes obscene profits earned from it all pretty much stay on the mainland. Foreign investors are effectively shut out.

    The big-time pools of investment capital -- American university endowments, insurance companies, and pension and sovereign wealth funds -- must salivate at the interest rates being paid in China by credit-worthy borrowers. They would consider it a triumph to put some of their billions to work lending to earn a 7% return. They are kept out of China's lucrative lending market through a web of regulations, including controls on exchanging dollars for yuan, as well as licensing procedures.

    This is starting to change. But it takes clever structuring to get around a thicket of regulations originally put in place to protect the interests of China's state-owned banking system. As an investment banker in China with a niche in this area, I spend more of my time on debt deals than just about anything else. The aim is to give Chinese borrowers lower rates and better terms while giving lenders outside China access to the high yields best found there.

    China's high-yield debt market is enormous. The country's big banks, trust companies and securities houses have packaged over $2.5 trillion in corporate and municipal debt, securitized it, and sold it to institutional and retail investors in China. These so-called shadow-banking loans have become the favorite low-risk and high fixed-return investment in China.

    Overpriced loans waste capital in epic proportions. Total loans outstanding in China, both from banks and the so-called shadow-banking sector, are now in excess of 100 trillion yuan ($15.9 trillion) or about double total outstanding commercial loans in the U.S. The high price of much of that lending amounts to a colossal tax on Chinese business, reducing profitability and distorting investment and rational long-term planning.

    A Chinese company with its assets in China but a parent company based in Hong Kong or the Cayman Islands can borrow for 5% or less, as Alibaba Group Holding recently has done. The same company with the same assets, but without that offshore shell at the top, may pay triple that rate. So why don't all Chinese companies set up an offshore parent? Because this was made illegal by Chinese regulators in 2008.

    Chinese loans are not only expensive, they are just about all short-term in duration -- one year or less in the overwhelming majority of cases. Banks and the shadow-lending system won't lend for longer.

    The loans get called every year, meaning borrowers really only have the use of the money for eight to nine months. The remainder is spent hoarding money to pay back principal. The remarkable thing is that China still has such a dynamic, fast-growing economy, shackled as it is to one of the world's most overpriced and rigid credit systems.

    It is now taking longer and longer to renew the one-year loans. It used to take a few days to process the paperwork. Now, two months or more is not uncommon. As a result, many Chinese companies have nowhere else to turn except illegal money-lenders to tide them over after repaying last year's loan while waiting for this year's to be dispersed. The cost for this so-called "bridge lending" in China? Anywhere from 3% a month and up.

    Again, we're talking here not only about small, poorly capitalized and struggling borrowers, but also some of the titans of Chinese business, private-sector companies with revenues well in excess of 1 billion yuan, with solid cash flows and net income. Chinese policymakers are now beginning to wake up to the problem that you can't build long-term prosperity where long-term lending is unavailable.

    Same goes for a banking system that wants to lend only against fixed assets, not cash flow or receivables. China says it wants to build a sleek new economy based on services, but nobody seems to have told the banks. They won't go near services companies, unless of course, they own and can pledge as collateral a large tract of land and a few thousand square feet of factory space.

    Chinese companies used to find it easier to absorb the cost of their high-yield debt. No longer. Companies, along with the overall Chinese economy, are no longer growing at such a furious pace. Margins are squeezed. Interest costs are now swallowing up a dangerously high percentage of profits at many companies.

    Not surprisingly, in China there is probably no better business to be in than banking. Chinese banks, almost all of which are state-owned, earned one-third of all profits of the entire global banking industry, amounting to $292 billion in 2013. The government is trying to force a little more competition into the market, and has licensed several new private banks. Tencent Holdings and Alibaba, China's two Internet giants, both own pieces of new private banks.

    Lending in China is a market rigged to transfer an ever-larger chunk of corporate profits to a domestic rentier class. High interest rates sap China's economy of dynamism and make entrepreneurial risk-taking far less attractive. Those looking for signs China's economy is moving more in the direction of the market should look to a single touchstone: is foreign capital being more warmly welcomed in China as a way to help lower the usurious cost of borrowing?

    Peter Fuhrman is the founder, chairman and chief executive of China First Capital, an investment bank based in Shenzhen, China.

    http://asia.nikkei.com/Viewpoints/Perspectives/Chinas-loan-shark-economy

    Mar 11 8:21 PM | Link | Comment!
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