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Killing it like a hooker in Hong Kong

Fund Info: Abax Global Capital

Oh how the stars of yesteryear have fallen so swiftly to the Earth. Abax was THE hedge fund launch of 2007. Everyone and their mom wanted in on these guys… who were they?

Let’s put together the story:

Abax launched in early 2007 with USD300mm in capital, most of it chipped in by Morgan Stanley. MS gave them a hunk of money in return for 20% of the firm’s equity. The plan was to do Special Situations, a fancy name for putting hedge fund money in private equity deals and waiting to get it out.

They did a bunch of small private equity deals in China, and some in South East Asia. Most of these involved Abax putting USD20-30mm in the form of a private convertible which would then be converted to equity once the investee IPO-ed. Unfortunately CBs tend to be really unattractive if you just have to carry them as bonds, they are unsecured, have small coupons, and have tenors between 5-7 years. The stocks they are based on are usually illiquid small caps, so a lot of the more interesting hedging can’t be carried out.

Looking at the deal list, these guys basically bought into a bunch of small caps, with the idea that each one would use the cash to finish an expansion project or for growth capital, and then IPO. They were very thematic, making multiple bets on China water industry, China gas industry, commodities and China consumer. They were not afraid to touch the dodgiest of the dodge, and ended up with one of the crappiest books I’ve ever seen. There was zero downside protection for the investor. None of the companies had assets that could be seized to make investors whole if the promoters turned out to be cads.

Some of the deals they did:

China Natural Gas (OTC:CHNG) :- A Chinese LNG and CNG infrastructure company. Invested USD40mm, 5% coupon with warrants struck at USD7.3. As of March 2009, stock is trading at USD2.50. The intent with this one was to provide capital for CHNG to complete their LNG facility, potentially quadrupling their earnings, and realize the warrants when they went public on NYSE or one of the other big boards.

Reuters

China Water Industry (HKSE:1129) :- USD50mm CB in Aug 2007. Conversion struck at HKD1.42, shares now trading (March 2009) at HKD0.126. This was a Chinese water treatment and sewage company.

PRNewswire

United Fiber Systems (SP:UFS) :- The deal that would not die. This thing has been passed around South East Asia like a Hong Kong hooker in heat. You have an potentially incredibly lucrative pulp and paper mill, which no bank project finance group will touch with a stick because of environmental concerns. Abax puts in USD25mm, with a promise to secure an additional USD200mm to complete the mill. As far as I can tell, Stephanie Fried hit the nail on the head, when she said it was a form of money laundering. Basically Abax fronts an investment of American and European bank capital into the project, and gets paid out of the equity investment. Abax’s commitment was struck at SGS0.355 per share, while Mar09 prices are SGD0.02. That’s right 2 cents.

China Mobile Media Technology (OTC:CHMO) :- A mass marketer of digital knick knacks. Invested USD21mm in Jan08. Warrants struck as USD2.00/share, as of Mar09 price was USD0.013 per share. No interest first year and 9.5% interest in the year after. Looks like this was the crappiest deal they did. No hard assets to have recourse too..

Coastal Greenland (HK: 1124) :- Chinese real estate developer.  USD45mm 8% notes with warrants due 2010. Invested Dec 2007, when share price was HKD1.50.  Mar09 share price HKD0.27. They owned 17% + of this company and started to sell off in Oct08. Must have started liquidating stake.

SinoEnergy Corp (OTC:SNEN) :- Another CNG play. USD20mm with average 6% coupon. Mar09 USD1.13.  Sept07 deal announce, strike at USD3.17.

Bio-Treat Technology (SP:BIOT) :- Another China water play. Fortunately for Abax, Bio-treat reneged on their borrowing agreement and never drew down the bulk of the cash. Whew what a relief. Case is in court now, with Abax suing to retrieve SGD5mm while if the investment had gone through they might have lost SGD100mm. Sigh. Strike was 0.76 on the deal, Mar09 price is, drum roll please… SGD0.03.

Who is Abax?

Chris Hsu:     He was forced out in Nov 2008. Excerpt from Top Trader’s Under 30.

Age: 27

After graduating early from Stanford with a degree in engineering, this Taiwan native got a job at Aristeia Capital in New York, followed by gigs at JMB Capital in Los Angeles and Chicago-based Citadel. Working out of Citadel’s Hong Kong office, Hsu led the firm’s Asian special-situations group. Now one year into his $300 million launch, Abax Global Capital, Hsu is invading China with the zeal of a thirteenth-century Mongol.

Donald Yang: formerly managing director and head of Hong Kong and Greater China debt capital markets atMerrill Lynch

Frank Qian: formerly a trader and risk manager in Asia, Europe and the U.S. at Citadel Group.

Andy Shpiz: Managing Director of Abax Global Capital. Formerly of Mellon HBV/Fursa Alternative Special Situations. Looks like a typical Filth-er, came out to HK, loved it, rode the curve up during the China IPO boom. Doesn’t look that well qualified, I mean IB at Allen & Co, is like Equities in Dallas isn’t it. Excerpt from Mellon bio below:

Andrew G. Shpiz will lead the Asian research effort in Hong Kong to support Asian deals in the firm’s global multi-strategy discipline and to identify further event driven opportunities throughout Asia. Before joining the company in 2001, Mr. Shpiz was a Vice President of Allen & Company Incorporated (“Allen”). Mr. Shpiz was employed by Allen since 1995 and worked in investment banking, where he was responsible for advising corporate clients and investing the firm’s capital in new businesses. Prior to working in investment banking, Mr. Shpiz researched and monitored investments for several internal special situation investment and risk arbitrage funds. Prior to joining Allen, Mr. Shpiz worked for Fidelity Investments for three years in various sales and trading positions. Mr. Shpiz received a Masters in Business Administration from New York University’s Stern School of Business in 1996 and a Bachelor of Arts degree in economics from Colby College in 1991.

Benjamin Happ: Amherst ’98 Psych who’s a very reasonable qualified Investment Mgmt guy. Expertise is capital raising. Looks like speaks Chinese from the backgrounder.

Danny Yong Ming Chong, Chief Investment Officer of Abax: Singaporean and old SJI boy (go go St. Joe)

Lee Ka Shao managed both macro positioning and the South Asia special situations portfolio. Now at Cavenagh Capital

Bonita Choi : Low level analyst and investor relations. What is a religious studies major from Toronto doing in a hedge fund? A) She must be cute B) she speaks Chinese. Combi of one and two would be perfect for handling testy older Chinese gentlemen watching their money evaporate.

Known Abax Related Entities
Abax Arhat Fund
Abax Claremont Ltd
Abax Global Capital
Abax Global Opportunities Fund
Abax Lotus Ltd
Abax Upland Fund LLC

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March 20, 2009 Posted by | China, Hedge Fund, Hong Kong | , , , , , , , , , , , , , , , , , , , | 7 Comments

How would I play the Treasury’s Public Private Partnership to buy assets?

Let me count the ways…

To recap, Geither proposes that the Treasury will contribute, say 70%-90%  of the funding required such toxic bank assets as long as unnamed hedge funds and private equity funds put in the remainder. Any loss that occurs would come out of the fund’s equity portion, before affecting the Treasury contribution.

Face value

This structure is essentially equivalent to having private investors contribute equity capital in a bank and having the government provide the deposits and unsecured debt. This would form the liability side of the balance sheet, and then the new shareholders would be incentivized to go out and buy bank assets. The key problem that this structure is supposed to resolve is that of price discovery: the private investors would have the incentive to price assets correctly in order not to lose their shirts.

As Mr. Geithner already knows from the AIG bailout, the devil is in the details, so here is an early preview of what could go wrong. Private investors will make a simple evaluation: Can I buy this toxic asset from a distressed bank, such that after whatever defaults may occur in the future, I will make a profit?

Cherry-Picking

The first thing I would do it cherry pick. I would go over a bank’s book, and wherever they have undervalued assets i.e. assets they have marked down already, but I think has a greater chance of recovery than they do, I would buy. This would load up the PPP bank with the higher quality assets, and leave the banks with lower quality assets. In return, the distressed banks will realize a profit because they sold the asset for a higher price than the mark.

Ring Fencing

The next thing I would do is ring fence, or play the odds. This is actually a typical private equity trick. Let’s say I have a 100 million dollars. I split that into ten vehicles, and have the Treasure give me 10:1 leverage on each vehicle. I have a billion dollars of firepower in 10 vehicles. I then make absolute punts with each vehicle, going for broke, buying stuff that no one else will buy. If each vehicle buys an asset at 30 cents on the dollar,  and just one of the vehicles manages full recovery and all the others go bust,  then for that one vehicle:

10mm equity+90mm debt = 100mm assets

after recovery

333mm assets = 90mm debt + 10mm interest + 233mm equity

My return on 10mm would be 2330% and on 100mm would 233%.

Most real banks are prevented from doing this because the Fed and FDIC has restrictions about how much risk they can take on the book, but the PPP vehicles will not.

My ring fence strategy would probably lose the Treasury a butt load of money, because they will lose money on all the other nine vehicles and won’t have recourse to my profitable tenth.

More coming soon…

March 20, 2009 Posted by | Credit Crisis | , , , | 1 Comment