Investment guru who puts family first

The high-profile Ant Group IPO has called attention to Primavera Capital’s dubious wealth management products. Jiemian News investigates shady practices in a market crying out for transparency and consumer protection.

Hu Zuliu. Photo from CFP.

Hu Zuliu. Photo from CFP.

With the investment world has been gazing in wonder at the Ant Group IPO, a curious article circulating in the backwaters of mainstream media has attracted quite a following.

Hu Zuliu, Where is your Conscience? takes investment guru HU Zuliu and his private equity fund Primavera Capital to task over management of a fund in which the author of the post had a sizeable stake. The article claims that Ant shares were shipped out of the portfolio and into an external fund controlled by Hu’s family at an artificially low price in 2018. The shares have since gone through the roof promising to generate a profit of US$200 billion when the IPO goes ahead.

Primavera Capital categorically denies everything and has threatened legal action against the author. What few people know is that behind the scenes an investigation instigated by other angry investors in the same product has been underway since at least 2019. The Ant IPO has shone a light into the murky world of wealth management, exposing little transparency and less consumer protection. Something has to be done.

In 2011 Primavera launched investment vehicle L1102. Investors were entitled to share returns on selected Primavera investments during their lifetime. Upon expiry (“exit”), all holdings were to be sold and proceeds passed to investors. L1102 consisted of investment in Ant Group, a private investment group and a healthcare company. Ant shares were bought in 2015 for 200 million yuan. When the product expired in 2019, 442 million was redeemed from these shares, slightly more than double the initial investment but far below their fair value according to Ant Group’s valuation at that time.

The returns on L1102 other investments also look suspicious. The final payoff on China Asset Management shares was lower than the original investment, despite CAM’s outstanding performance during the period. One investor, Mr. Bai told Jiemian News of his anger and disbelief. “I put in 1.02 million and got 1.05 million back eight years later. I would have made more if I’d simply kept the money in my checking account! That’s the masterwork of a ‘world-renowned economist’ and investment guru? You’re kidding me.”

One of the focal points of the dispute is whether L1102 transferred Ant Group shares to Hu’s family with a deliberately false valuation and without telling investors. Until at least September 2017 when the product was originally set to expire, L1102 investor reports consistently reaffirmed the intention to exit Ant through the secondary market which would enable investors like Mr. Bai to cash in on Ant’s IPO. The December 2018 report shows Ant and China Asset Management shares as having been “transferred to an external fund under a negotiated agreement. Investors claim this “external fund” is controlled by Hu’ brothers and sisters.

The investors want the transfer invalidated since it was conducted without their consent, but any number of legal and linguistic hobgoblins appear to give Primavera almost unlimited powers to do as they please.

According to the L1102 contract, Primavera should do their best to liquidate the portfolio upon expiry if there is no “strong willingness” on the part of investors to extend its term. There are precedents in which “strong willingness” appears to mean “unanimous willingness.” In 2017, L1102 investors certainly did not make a unanimous call for continuance, but whether Primavera, a “custodian” rather than a manager of the portfolio, should have polled investors is questionable. Also questionable is the price of Ant shares at the time of disposal.

Our investigation found that Primavera L1102 owned 0.1 percent of Ant Group, but controlled 22 percent of a fund called Primavera Jinxin, which acquired 0.47 percent of Ant Group in 2015. The fair value of L1102’s shares in Ant Group in 2018 was about a billion yuan, more than twice of the 450 million yuan the transfer brought in.

These shenanigans are very distant from standard asset management practice. If a fund chooses not to exit through the secondary market, the Primavera case, it would usually seek institutional buyers in the primary market through an open bidding process.

“For a deal as hot as Ant Group, there would have have been a bidding war,” a fund manager said. Another senior fund manager also said that in a similar case involving a tech company, his team had chosen the highest bidder.

Investors have questioned Primavera’s other investments. A breathtaking 80 percent of L1102 consisted of China Asset Management shares, which made a meager 1.9 million yuan on a 1.7 billion investment over eight years.

As a private fund, the valuation of China Asset Management is hard to obtain, but financial disclosures show the firm in sound shape during the period. Net profits in the past five years have consistently been well above 1 billion yuan, according to CITIC Group, which owns 62 percent of the fund.

When L1102 closed, its China Asset Management shares were sold to other Primavera entities for 1.55 billion yuan. Given the financial condition of China Asset Management at that time, the deal seems to have been a rare bargain for the buyers, and a real roasting for L1102 investors.

According to the L1102 closure report, the fund invested 2.1 billion yuan in the three companies between 2011 and 2015. The total payout, including dividends, was 2.47 billion yuan during the entire lifespan of the product, an effective annual return of less than 2 percent, lower than the average bank interest rate and hardly the work of a “world-renowned economist and investment guru.”

Even that 2.47 billion didn’t make it to investors. Primavera Capital charged each investor management fees amounting to over 240 million yuan upfront, leaving only 130 million for investors to share between them.

“They sold my investment at a loss so that their family could continue to make money from it, and charged me a fee for doing that? I honestly don’t get it,” said a forlorn Mr. Bai.