Moody's Investors Service, responding to investor concerns, on Monday raised warnings about accounting and corporate governance risks at dozens of China-based companies.The Carlyle Group had two Chinese affiliates involved in scandals, China Forestry and China Agritech. Seeking Alpha reported:
The report comes as U.S. and Chinese officials meet in Beijing to discuss joint supervision of China-based audit firms that review U.S.-listed companies.
Accounting scandals at U.S.-listed companies based in China have been the subject of regulatory probes and dozens of investor lawsuits.
Fertilizer producer China Agritech (Pink Sheets: CAGC) has been delisted and resumed trading sharply lower on the pink sheets.Business Insider stated:
China Forestry was a billion USD Hong Kong listed Chinese company with many Private Equity funds having stakes. The leading stakeholder is Carlyle (or more precisely funds belonging to Carlyle’s clients). The stock has been suspended after admitting “accounting irregularities”. But it is worse than that.Harsh, hard hitting words. Not the kind Carlyle wants spread heading into an IPO.
China Forestry had a business model which consisted of fast-growth forestry to extract greenhouse gas credits - a business model that barely made sense to some analyst guys that looked at it.
Now China Forestry remains suspended. No reasonable questions are being answered - so I am going to reveal to you the Analyst gossip: the bulk of the forests do not exist. Sure they had some “front” - plantations they would take potential investors to. But the vast bulk of the business was a fiction and “accounting irregularities” is code for “fiction”.
Oh - and Carlyle dusted $105 million.
If this is fraud then Carlyle has egg on their face. After all - what is the point of having all those investment professionals if they get dusted by the simplest of frauds. The whole point of private equity is that by pooling capital you can get insider positions and you can run the company for cash - for the benefit of your investors. But if your “insider position” doesn’t even allow you to spot the business does not exist then your insider status is worthless. You might as well close up and go home. You have no right to be in business.
A former business reporter weighed in on private equity and China:
I can't tell if the PE guys are being insincere when they talk about China or they are actually stupid. There is no way that the Chinese govt would let American firms come in and strip cashout of Chinese companies the way they've been allowed to in the US! I imagine the Chinese welcome the PE guys because they see it as another way (through PE orchestrated mergers) to get hold of more American technology and companies and jobs.I believe this reporter is spot on. China and PEU's take companies public in Hong Kong or NASDAQ. Week in China reported on "accounting tricks."
That’s because a spate of accounting frauds have beset Chinese companies with American listings.
It's no skin off China if Western investors lose.
One VC manager responded that some of the Chinese firms he’d invested in kept three sets of books.
I understand that's true for quality reports. One set of quality tests for the West, another set for domestic purposes. Guess which one is export fiction?
Update 7-13-11: WSJ reported China Forestry " is implementing a series of changes, including centralized financial reporting and hiring new management." Good thing Carlyle got "make up ships."
Update 7-14-11: Carlyle's Chris Ullman worked hard to reverse Moody's story, giving an update on Beijing Carlyle Investment Center L.P. The fund raised $495 million, 64% of its target. It received a Chinese designation that will enable it to market to social security funds.
Update 9-4-11: Carlyle indirectly invested in China with its purchase of a British carpet maker. Carlyle offloaded Brintons' pension to Britain's Pension Protection Fund.