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+852 2854 2666 ()+44 20 7242 2666()mailbox@firstcitypr.com

Hong Kong Office:19F Silver Fortune Plaza1 Wellington Street CentralHong Kong

First City (China) Ltd. Registered in Hong Kong no. 1038429

Client: China Private Equity

Source: PE Asia

Date: 9th December 2011

AIMing high

650 words9 December 2011Private Equity AsiaPEIEnglishCopyright 2011. PEI Media Ltd. All rights reserved.

UK-listed China Private Equity recently marked the second anniversary of itsAIM listing and is moving closer to making its first exit

China Private Equity Investment Holdings (CPEIH), which listed on the UKsAlternative Investment Market in late 2009, uses a structure different to thegeneral partnership framework favoured by many private equity firms.

It was easier to structure the business as a company rather than as a generalpartnership, says chief financial officer Ernest Wong. You have greaterliquidity than with a closed ended fund, its more transparent, and you havebetter corporate governance under a listed regulatory regime.

Based in Hong Kong and led by chief executive Duncan Chui, the CPEIHteam chose to list in the UK rather than Hong Kong for regulatory reasons. AChapter 21 listing in Hong Kong limits investment in other companies to 30percent, whereas a London AIM listing allows us to take control positions,

Wong explains.

The strategy is not entirely unique, notes Dean Collins, a Singapore-basedpartner at law firm OMelveny & Myers. A number of Asian funds pursued thisroute prior to the financial crisis but with mixed results. An AIM or other listingis regarded as easy money but it is often short-term many sophisticatedfund managers avoid this route for a number of reasons. For example, it isdifficult to build long term institutional relationships with investors who are nottied in for the long run.

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Hong Kong Office:19F Silver Fortune Plaza1 Wellington Street CentralHong Kong

First City (China) Ltd. Registered in Hong Kong no. 1038429

Investors value can also be adversely affected by movements in the marketswhich are unrelated to the underlying portfolio, Collins says. Because a listedfund generally needs to draw down all its capital at the time of listing yetcannot necessarily utilise it for investments immediately this has a drag onthe investors returns, he adds.

Wong counters those criticisms, however. A listed fund or investmentcompany does not incur management fees, he says. The management hasthe same interest as the shareholders, that is, driving strong performance ofthe company. If the company performs well, the institutional investors shouldnot a have problem investing long-term in it, so it is not impossible to buildlong term relationships with those institutional investors. Normally thecompany will raise funds with a pipeline of investments established already,so there should not be much of an early draw down issue.

CPEIHs approach to portfolio construction is also somewhat unusual: Itmakes one or two anchor investments in two core sectors, financial servicesand TMT. Other investments we make must have synergies with thoseanchor businesses, Wong says.

The firms total net assets as of 30 June this year, according to its interimresults statement, stood at $34.7 million, with net cash of $500,000. Wongsays CPEIH can raise funding as required for new deals through share issuesor by going to the market.

One core investment, Fortel, is set to float in Hong Kong early next year,which will mark CPEIHs first full exit. The group has already realised part ofits investment in Fortel it sold 5,503 shares in the business in April, raising$3.5 million, and leaving it with a 33.6 percent stake. The firm targets anannual IRR of 30-35 percent, according to its website, but it is unclear what itsreturn on the Fortel deal will be until the IPO is priced.

Another of the firms anchor investments is online securities trading platformEnfinium International it is Australia-based, but keen to access the Chinesemarket. The investment exemplifies CPEIHs re-jigged strategy: earlier this

year it amended its investment policy to allow it to invest in businessesoperating outside China, but with exposure to the Chinese market. Thisinitiative gave the group greater headroom to find attractive deals, and alsoallowed them to diversify their portfolio geographically, Wong says.

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