Abax Global Capital, a Morgan Stanley-backed manager of $900 million of hedge and private equity funds, plans to start a fund this year to invest in U.S.-listed Chinese companies that will be taken private.
Abax Global Capital is seeking $300 million initially for the fund, which it may start in the first half, Donald Yang, its Hong Kong-based managing partner, said in an interview yesterday. Such investments, including in Harbin Electric Inc., helped the $300 million Abax Global Capital special situations fund return 28 percent last year.
Managers like Abax Global Capital are planning funds with multi-year restrictions on redemptions to enable longer-term investments. Swings in frequently traded assets and the high correlation between different markets led to hedge funds' second-worst annual performance last year since at least 1990, according to data tracked by Chicago-based Hedge Fund Research Inc.
"It's very hard for a pure public strategy in this market," said Yang. "From a risk-reward point of view, it's going to be a very challenging market for equities, probably more downside than upside. Credits are the same story."
The HFRI Fund-Weighted Composite Index declined 5 percent last year.
The Abax Global Capital special situations fund bets on companies in Asia, especially in China, whose debt and equity prices move as a result of mergers, hostile takeovers, asset sales and large share buybacks.
It returned 21 percent in the fourth quarter, Yang said. The majority of the profits came from actual or mark-to-market
gains from deals involving U.S.-listed Chinese firms being taken private, such as the completion of the management buyouts of Harbin Electric and China Security & Surveillance Technology Inc.
Valuations of smaller Chinese manufacturing companies traded in the U.S. plummeted after the global financial crisis. The market value of U.S.-listed Chinese companies has tumbled since November 2010 amid allegations of financial fraud by short sellers such as Muddy Waters Research.
The USX China Index, which tracks the performance of U.S.-listed companies that derive most of their revenue from China, has declined 18 percent in the last 12 months. Shares of Sino-Forest Corp., facing allegations from Muddy Waters it had exaggerated its timber assets and operated a Ponzi scheme, have lost 94 percent since the end of 2010 in U.S. over-the-countertrading.
U.S. regulatory investigations since 2010 into accounting practices of Chinese companies that gained listing on American exchanges through reverse mergers also damped share prices.
In some of the fund's investments in the privatization of U.S.-listed Chinese companies, such as Harbin Electric, Abax Global Capital turned its public equity holdings into private equity investments, said Yang.
Abax Global Capital has held talks with Chinese private investors about the dedicated fund to invest in U.S.-listed Chinese companies being taken private, said Yang. Investors in the fund, which will be available to international investors and Chinese citizens with offshore accounts, will commit their money for at least five years, he added.
The planned fund will surpass a $50 million managed account set up last year for a small group of investors, which makes similar investments together with the Abax Global Capital special situations fund, said Yang.
Abax Global Capital 's other investments in U.S.-listed Chinese companies being taken private include Fushi Copperweld Inc.
Seventeen deals to take U.S.-Chinese companies private have been announced since 2009, and seven have been completed so far, according to data compiled by Bloomberg.
The shortage of bank financing amid the European debt crisis has made it difficult to arrange such deals, because the investors will have to negotiate a lower price to achieve the same expected returns without leverage, said Yang.
Private equity investors trying to strike deals without leverage may also find it hard to negotiate with chief executive
officers, who are typically majority stakeholders, Yang said. The size of the investments required to complete a privatization would probably dilute the CEO's holdings and result in the outside buyers taking majority stakes in the companies.
Most of the assets in the Abax Global Capital special situations fund are in privately negotiated debt and equity securities, including
fixed-income, structured loans and private equity types of investments, Yang said.
Abax Global Capital is also planning to start a fund for investments in Chinese real-estate projects in partnership with former Beijing-based Merrill Lynch & Co. real-estate fund investment professionals led by Greg Peng, Yang said. It will raise yuan capital from Chinese investors and will target returns of 25 percent to 35 percent from the investments, Yang said.
Chinese investors have committed about 1 billion yuan ($159million) to the fund, which is going through business
registration and may hold its first close by the second quarter, Yang said.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.