On the streets of China’s eastern city of Hangzhou, a fluorescent board like those used to peddle sandwiches in a cafe is offering a piece of China’s biggest leveraged buyout.
With the lure of 500 percent returns, wealth managers including Overseas Chinese Fund and Jinlu Financial Advisors are selling investments linked to Qihoo 360 Technology Co.’s $9.3 billion take-private deal and the promise of cashing in on a future re-listing in China. Offers for individuals to take part in a takeover are unusual, with funding for such deals typically coming from companies, banks and experienced specialists such as venture capital and buyout firms.
Across the country, financial institutions acting as middlemen are tempting individual investors to provide funding for Wall Street deals taking place on the other side of the world. Such intermediaries are seeking a quick return from management fees, which is fueling an investment frenzy that could increase risks for the less sophisticated investors.
“It’s a reflection of Chinese investors’ chase for high returns despite the greater risks,” said J.P. Gan, a Shanghai-based partner at Qiming Venture Partners, which manages four funds with more than $2.5 billion in assets. “This practice is rarely seen in the U.S. or other Western markets.”
Qihoo, which had net income of $307 million in 2015 selling security and browser software to the world’s largest internet population, announced a deal to be bought by an investor group in December last year with plans to complete the transaction during the first half of 2016. The buyers include senior management, along with Ping An Insurance Group Co., Sequoia Capital China, Golden Brick Silk Road Capital and New China Capital.
Street sales are unlikely to directly influence the Qihoo take-private deal, which Tencent’s QQ.com has reported has secured funding and is in its final stages. It’s unclear how much of the money committed was repackaged by financial institutions into investment products sold by retail brokers like Jinlu.
The practice however raises questions of risk for individual investors. Shanghai-based Jinlu is promising investor returns of as much as 5.1 times their investment based on Qihoo attracting a multiple of at least 60 times earnings if it relists in China and generating net income of $1 billion by 2019, according to investor presentation material seen by Bloomberg. That would value the Internet security company are about $60 billion, more than six times the buyout deal.
The presentation doesn’t present a range, just the top estimate on returns.
That price-to-earnings ratio is a “conservative” estimate as most Chinese companies are fetching multiples of 100 and above, Jinlu said in its investor material. Media firm Baofeng Group Co. for example has a ratio of about 80 times earnings. In contrast, Apple Inc. trades at 11 times earnings.