When US private equity group Blackstone announced in June that it would acquire the Massachusetts-based media and research firm International Data Group, retail investors in China were watching the news with nervousness.
The $ 1.3 billion deal, which closed on Wednesday, will transfer funds to China Oceanwide Holdings, the former owner of IDG and a real estate developer with an international footprint and a slew of unpaid debt.
The sale is a rare link between securing global deals and the plight of retail investors exposed to China’s vast real estate sector, where developers like Evergrande and Kaisa struggle to honor billions of dollars in liabilities.
Oceanwide’s need for liquidity also highlights the risks in China’s huge wealth management industry, where some real estate developers have raised funds without always disclosing the amounts in their financial statements.
Oceanwide investors allege they were not reimbursed on the investment products they bought from the company’s subsidiaries last year when its financial health was already under immense pressure – and say it ‘they were told that the money from the sale of IDG would be used to pay them back.
“For investors, IDG is the last hope,” said an owner of Oceanwide wealth management products, who said he had never heard of Blackstone before and asked how much of the proceeds would be available to them. Another suggested that the “hole is too big”.
Some investors said they have filed official complaints with Chinese authorities, including the China Securities Regulatory Commission and an economic investigation department of the Shanghai Police Force.
Oceanwide declined to comment.
Oceanwide bought IDG in 2017, during a period of ambitious overseas expansion that echoed across China from companies – led by conglomerates such as HNA and Dalian Wanda – that left the company significant real estate holdings in the United States.
But the group has struggled financially for the past two years, culminating in the seizure of its assets in San Francisco by creditors in October. Beijing’s strict limits on real estate leverage, which have been put in the global spotlight by the recent fate of Evergrande, have also made it more difficult for Oceanwide and its peers to raise funds and meet their obligations.
Malfunctions of developer-related wealth management products have even led to social unrest. In September, angry investors came to Evergrande’s headquarters in Shenzhen to protest late payments for the wealth management products it had guaranteed.
Kaisa, another developer, recently confirmed that the investment products he was backing had missed payments. Fitch, the rating agency, noted this month that the company did not record the products in its financial statements.
The difficulties came along with the missed payments on the international bonds of several companies. âWe expect Chinese developer defaults to increase over the next six to 12 months,â said Edward Chan, analyst at S&P.
Oceanwide, which was led by its billionaire founder Lu Zhiqiang until 2020, has grown into a financial conglomerate with real estate developments in New York, Hawaii and San Francisco in addition to its projects in mainland China.
But in early 2019, his PwC auditor resigned. The group’s financial health deteriorated further during the coronavirus pandemic, and S&P and Fitch ceased rating its bonds at the company’s request in March 2020.
PwC declined to comment.
The San Francisco project was foreclosed after bonds valued at around $ 330 million matured and another Oceanwide subsidiary failed in May. A long-standing attempt to acquire Genworth Financial, a US insurer, failed in April before the sale of IDG. Blackstone declined to comment.
In its final report on Oceanwide early last year, S&P downgraded its rating to triple C and warned of “the risk of increasing repayment of Oceanwide’s short-term debt maturities.”
But Oceanwide continued to issue onshore wealth management products in 2020 through a company called Oceanwide Investment Fund Management, a subsidiary of Minsheng Wealth, a financial services company that is a wholly-owned subsidiary of China Oceanwide. Holdings.
The 75-page offer for a product released in November 2020 indicated that the product would be invested in the credit markets in general.
Investors said payments largely ceased in February. In July, Oceanwide posted a repayment plan on his account on WeChat, the Chinese messaging platform, which it said would result in full payment by March 2022.
A 39-year-old investor, who says he spent Rmb3million on a wealth management product recommended by a friend, said local authorities had “gone to great lengths to prevent investors from organizing.”
Another investor in a large city in eastern China said that after the payments stopped and they reported the problem to the police, they were targeted by government surveillance. When they visited Oceanwide’s headquarters in Beijing, they said they were followed by seven officials from their hometown.
âThe local government has invested a lot in making us behave rather than solving our problems,â the person said. âThis is because they could be punished if we continue to report our case to the central government. “
Reporting by Thomas Hale in Hong Kong, Sun Yu in Beijing and Wang Xueqiao in Shanghai