Dealmakers jump ship as China tycoon Xie Zhikun's US$5b M&A push ends

[HONG KONG] Like many Chinese tycoons in the heady days of early 2016, Xie Zhikun had big plans to parlay his homegrown fortune into an overseas empire.

He poached top dealmakers from Qatar's sovereign wealth fund, Bank of America Corp and KKR & Co. He rented a sprawling office in a prestigious Hong Kong skyscraper, just a few floors down from Goldman Sachs Group. And he vowed to fund nearly US$5 billion of global takeovers over three years.

Mr Xie's tally of completed deals: zero.

The shadow-banking mogul's ambitions, like those of many of his peers, have been squashed by the iron fist of the Chinese state.

Stymied by the nation's clampdown on capital outflows and reverse mergers, Mr Xie is now preparing to dramatically scale back operations at ZZ Capital International, the Hong Kong-listed private equity firm that served as his main vehicle for overseas deals, according to people familiar with the matter.

A number of senior executives are negotiating severance packages, and a core of less than 10 people will likely remain at the firm's headquarters after the Chinese New Year holiday in mid-February, the people said.

The retreat is the latest sign that China's business elite see little hope of a reversal in President Xi Jinping's crackdown on outbound dealmaking, which has hemmed in other high-flying tycoons including HNA Group's Chen Feng and Dalian Wanda Group's Wang Jianlin.

It also adds to a string of recent setbacks for Mr Xie, 57. The businessman has been mired in a dispute related to another international private-equity fund, while the Chinese trust company that generated much of his fortune delayed customer payments on two of its products earlier this month.

ZZ Capital International swung to a net loss in the six months ended September after an 89 per cent drop in revenue. The firm had 64 employees at the end of the period.

"Steps have been taken to make a number of redundancies in the Hong Kong office, but these will have no impact on daily operations," a representative for ZZ Capital International said in response to Bloomberg queries on Tuesday. "Other group operations and teams in the US and UK remain unchanged."

There's no evidence that Mr Xie's dealmaking has been singled out by the authorities or that his businesses in China are facing financial stress. The situation is fluid, and details of ZZ Capital International's future strategy could change, according to the people, who asked not to be identified because the discussions are private. A representative for Mr Xie's main holding company, Zhongzhi Enterprise Group, declined to comment.

Mr Xie is married to a famous Chinese pop singer, and his older brother used to help run a US$650 billion Chinese government fund that controls the nation's biggest banks. But Mr Xie's business dealings have remained mostly out of the public eye.

The tycoon is most closely associated with Zhongrong International Trust, China's third-largest trust company. His holding company owns about 33 per cent of Zhongrong, according to the trust firm's latest annual report.

Sales of Chinese trust products - which are marketed to wealthy investors - have boomed in recent years amid the rapid expansion of China's US$15 trillion shadow banking industry. In some cases, the cash raised from such products has been used to help fund acquisitions.

This year kicked off with renewed scrutiny of the industry as Chinese policy makers crack down on excessive leverage in the financial system. Zhongrong delayed payments this month to investors on two products tied to local government borrowings, people familiar with the matter have said. The funds were later repaid, according to a statement from the borrower.

Mr Xie formed ZZ Capital International near the height of China's record-breaking foreign acquisition spree in early 2016, before the authorities had begun their clampdown on overseas deals and reverse mergers. He hired a string of high-profile bankers to run the firm, including Michael Cho, the top dealmaker at Qatar Investment Authority.

Mr Cho, who was previously head of Asia mergers and acquisitions at Bank of America Corp's Merrill Lynch unit, brought on several former colleagues from the investment bank, according to the people with knowledge of the matter. He was paid a basic salary of US$1.8 million per year, plus other benefits including a monthly housing allowance of HK$130,000 (S$21,800). Executives also joined from Bain Capital and KKR, the buyout firm co-founded by Henry Kravis and George Roberts. Mr Cho couldn't immediately be reached for comment.

Mr Xie set up his team in the heart of downtown Hong Kong in an office formerly occupied by Barclays. He promised them 10 billion yuan (S$2.1 billion) annually for three years to spend on acquisitions, the people said. At the time, only KKR's Asian private-equity fund had a bigger war chest in the region.

He also had a preferred road map for extracting value from offshore acquisitions, which involved quickly relisting assets on a Chinese stock exchange at higher valuations, the people with knowledge of the matter said. The key was Mr Xie's control of a number of shell companies trading in the domestic market that could be used for backdoor listings, according to the people. A wrinkle emerged just a few months later, when Chinese regulators began taking steps to curb the flow of such deals.

ZZ Capital International's first - and only - acquisition announcement came in July 2017, when the firm agreed to buy Alerian, a US provider of energy-industry indices, for as much as US$812 million.

But the deal has yet to close. ZZ Capital International needs additional time to fulfill the conditions of the purchase, the firm said in a Jan 15 stock exchange statement. It will be required to pay a fee if the deal is scrapped due to a financing failure, according to the filing.

It's not the first time Mr Xie's overseas ambitions have faced headwinds.

He has clashed with the co-founder of XIO Group, a London-based private equity fund, over the ownership of an investment vehicle, according to court documents filed last year in the Cayman Islands. XIO's co-founder, star Chinese money manager Athene Li, has repeatedly denied having any involvement with Mr Xie.

XIO's acquisitions include the US$1.1 billion purchase of JD Power & Associates, completed in September 2016, and the takeover of Israeli medical-laser company Lumenis Ltd for more than US$500 million in October 2015.

ZZ Capital International, for its part, is taking steps that could reduce its reliance on Mr Xie. The firm said in November it's started discussions with external financial institutions to diversify its capital sources. It has also become "more selective" as a result of China's tightened currency controls and heightened regulation over Chinese outbound acquisitions, according to a filing at the time.

Shares of ZZ Capital International were unchanged at 11.30am on Wednesday in Hong Kong, after closing the previous day at the lowest level since July 2015. They've declined 56 per cent over the past year.

BLOOMBERG