The Carlyle Group, the U.S. buyout giant backing China Pacific Insurance (Group) Co Ltd, could make a $4 billion profit — a return of more than six times its investment — once China's No. 3 life insurer floats shares in Hong Kong.
That would be the biggest investment return for a private equity deal in China, and Carlyle's most successful investment in Asia, according to people with direct knowledge of the matter.
Asia-focused private equity funds often complain that Asia can be a cash drain, with plenty of money going into the region, but little coming out. But Carlyle could potentially make an eye-popping return on China Pacific.
Carlyle paid an average 4.2 yuan per share for its 17 percent stake in China Pacific, or just over $800 million, in a series of investments between 2005 and 2007, according to sources. That equates to around HK$4.75 per share.
Should China Pacific price its planned Hong Kong IPO at HK$30.1 per share — the upper end of an indicated range — Carlyle's stake would be worth more than $4.8 billion, more than six times what it has invested, and a big win for Carlyle in Asia, where deal competition is getting tougher.
In October, TPG Capital sold its stake in top Australian department store chain Myer in an initial public offering, netting a profit of $1.46 billion.
Even before China Pacific went public in Hong Kong, Carlyle co-founder David Rubenstein showcased the fund's success in the insurer at its annual global limited partner meeting in Washington D.C.
"When Rubenstein talked about Asia, he spent quite a long time purely talking about China Pacific and giving high praise to X.D. Yang," said one source who attended the meeting.
X.D. Yang, a Hong Kong-based managing director for Carlyle's Asia buyout fund, was the dealmaker for the China Pacific investment in 2005.
Both Carlyle and China Pacific declined to comment for this article.
Last month, Rubenstein told an industry forum in Hong Kong that China would be the single most attractive country for Carlyle in the next couple of years.
China Pacific aims to list in Hong Kong before Christmas in what is likely to be the world's sixth-largest IPO this year.
"Remember; when Carlyle first invested in China Pacific, the insurer was losing money and (was) in bad shape," said Wang Xiaogang, analyst at Orient Securities in Shanghai. "Now, it proves to be quite a good deal for Carlyle."
Carlyle built its China Pacific stake over a series of investments.
In late 2005, Carlyle and U.S. firm Prudential Financial Inc jointly invested $410 million for a near-25 percent stake in the life insurance unit of China Pacific Group, beating off rival bidders including AIG, Citigroup and Singapore state investor Temasek.
In 2007, Carlyle and China Pacific Group reached a new deal to allow Carlyle to increase its investment and also convert its shareholding in the group's life insurance unit into a stake in the parent, China Pacific Group.
That left Carlyle with 17 percent of China Pacific Group for a total cost of over $800 million, said the people, who declined to be identified as they were not authorized to speak to the media.
China Pacific went public in Shanghai at the end of 2007. Carlyle cannot exit from China Pacific's Shanghai listing due partly to foreign exchange controls, and China Pacific's Hong Kong listing was a key condition for the 2007 deal.
However, Carlyle can't sell any of its shares before a Hong Kong IPO lock-up of one year. Analysts also reckon Carlyle would only sell part of its stake after that lock-up period, seeking to maintain its relationship with the insurer and, crucially, the Chinese government.
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