HONG KONG (Reuters) – Starr International, an investment firm controlled by U.S. insurance tycoon Maurice “Hank” Greenberg, has failed to win Beijing’s approval to launch a planned private equity joint venture with top China brokerage CITIC Securities (600030.SS: Quote, Profile, Research, Stock Buzz), sources said on Wednesday.
Early last year, Starr International and CITIC Securities, backed by state-owned conglomerate CITIC Group, jointly announced that they planned a 50/50 private equity fund venture with initial registered capital of 1 billion yuan ($145.5 million).
If successful, it would have become the first private equity fund venture to be launched by a foreign investor and a domestic brokerage in China. Such arrangements lie in a regulatory grey area, with no specific rules governing them.
Not wishing to set a precedent that other foreign private equity firms might follow, the China Securities Regulatory Commission (CSRC) rejected the planned venture, two sources with direct knowledge of the matter told Reuters.
“The regulator doesn’t want to make it a unique case so that other foreign investors take it as a model,” said one of the sources.
“It’s also complicated to have a foreign partner for such business as you also need to talk to the foreign exchange regulator to seek an investment quota,” he added.
It was not immediately clear whether Starr would seek to adjust its proposed joint venture structure to address Beijing’s concerns.
The sources declined to be identified due to the sensitive nature of the situation. CITIC Securities declined to comment, while Greenberg, the longtime former chief of American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), could not be immediately reached for comment.
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Foreign private equity companies have had difficulty in China, where mistrust of western-style leveraged buyouts runs deep among regulators.
“In particular to big deals, it is difficult for foreign investors to seek approval from the government, which is concerned about a lot of issues including national security and foreign exchange control,” said Kenneth Zhou, a counsel specialising in mergers and acquisitions at law firm Wilmer Hale.
Earlier this year, U.S. buyout giant Carlyle Group [CYL.UL] finally walked away from three years of negotiations to buy Xugong, China’s top construction equipment maker, after running into bureaucratic obstacles. (For details: [ID:nSHA323138])
Despite failure to team up with Greenberg’s Starr, instead, CITIC Securities won approval from the CSRC earlier this year to set up its own private equity house called CITICS Private Equity Funds Management Co Ltd, part of a new national scheme that Beijing wants to promote its domestic private capital sector.
CITICS Private Equity Fund Management, one of about a dozen Chinese brokerage-run private equity firms approved by CSRC this year, is expected to manage its first investment fund of 6 billion yuan to focus on consumer, retail and energy sectors.
Early this year, Greenberg’s Starr and others tried to buy into China International Capital Corp, in which Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) holds a one-third stake, but the deal did not proceed due partly to price concerns, industry sources said. ($1=6.873 Yuan)
By George Chen
(Additional reporting by Lilla Zuill in NEW YORK
(Editing by Jacqueline Wong)