The end of a long journey is at last in sight for the Carlyle Group. The US private equity firm first entered into its alliance with China Pacific Insurance in December 2005, paying US$410 million for a 24.9% stake in China Pacific's life insurance subsidiary.
Private equity investments of this scale are rare in China. And it is even rarer for a foreign buy-out fund to be permitted to take such a large stake in the country’s closely guarded financial sector. The injection of capital and expertise – Carlyle brought in Prudential Financial as a strategic investor to share its insurance experience – was supposed to put China Pacific on the fast track to compete with the likes of China Life and Ping An.
Now one of the final pieces of the plan has fallen into place: China Pacific has received the green light from Beijing to sell shares in Hong Kong.
The offshore initial public offering (IPO) would have been part of the deal from the outset, simply because Carlyle needs to realize some, or all, of its stake in US dollars so it can make distributions to investors. But the process has been protracted by the financial crisis.
China Pacific listed in Shanghai in December 2007, raising US$4.1 billion. Ahead of the IPO, Carlyle swapped its 24.9% stake in the life insurance subsidiary for a 19.9% holding in China Pacific itself, taking the total investment up to US$740 million in the process. After the IPO, Carlyle’s stake fell to 17.32%. Plans to follow this up with a US$4 billion share offering in Hong Kong, however, came to naught as the market for IPOs dried up.
Since the start of the year, the media has drip-fed rumors of a resumption.
In mid-July, China Pacific was said to be in discussions with investment banks on re-launching the IPO. The company wanted to find a way around its earlier pledge not to list shares in Hong Kong at below the value of its Shanghai IPO price of RMB30 (US$4.39) per share (unrealistic during a tepid back-end of 2009, especially given that dual-listed shares tend to trade at higher multiples in Shanghai than in Hong Kong).
Two weeks later it was reported that the underwriters had been appointed, China International Capital Corp (CICC) taking the lead with UBS, Goldman Sachs and Credit Suisse helping to arrange the share sale.
Finally, on Wednesday, China Pacific said it had received approval from the China Securities Regulatory Commission (CSRC) to list up to 990 million shares overseas. The company has said it won’t sell for less than RMB23.52 a share, which puts it on course to raise at least US$3.4 billion.
Carlyle probably won’t cash in its entire stake in China Pacific once the lockup period ends – private equity firms are loath to confirm Beijing’s worst fears that they are nothing more than financial mercenaries – but it is sitting on a huge paper gain. Based on China Pacific's Shanghai share price, the original investment is now worth at least US$5 billion. Money worth waiting for.