Carlyle exits CPIC through $796 million block trade

The sale comes after sharp gains in the Chinese insurance company’s share price and pushes the total proceeds from Carlyle’s CPIC sell-downs above $5 billion.
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CPIC celebrating its Hong Kong IPO in 2009
<div style="text-align: left;"> CPIC celebrating its Hong Kong IPO in 2009 </div>

On the back of sharp gains in Chinese insurance stocks during the past week, Carlyle Group last night sold its remaining shares in China Pacific Insurance (Group) Co, raising HK$6.17 billion ($796 million).

The sale — Carlyle’s fifth in Hong Kong-listed CPIC during the past three years — had been widely expected ever since the private equity firm’s latest lockup expired in October and became almost inevitable after CPIC’s share price rallied 11.3% in the past five sessions. The stock broke HK$30 for the first time in 17 months last Wednesday and yesterday closed just 1.1% below the fresh 52-week high of HK$31.35 that it set on Thursday.

Despite those gains, the deal was offered at a tight discount of up to 3.2%. That didn’t appear to be a deterrent, however, and when the books closed at 9pm last night (Hong Kong time) more than 110 investors had submitted orders. Indeed, the interest was strong enough that the bookrunners were able to fix the price at the top of the range for a discount of just 2.26%.

The fact that this was a clean-up trade that removed the final overhang caused by Carlyle’s remaining stake likely played a role, but more importantly, analysts see scope for a rerating of the entire Chinese insurance sector and many of them are in the process of upgrading their earnings estimates and recommendations.

The key reason is a liberalisation of the investment limits for Chinese insurers and the announcement that they will be allowed to set up mutual funds. In the long run, this should help improve the investment returns for these companies, analysts say.

CPIC’s Hong Kong-listed H-shares gained 7.2% in a first knee-jerk reaction to the mutual fund news on January 2, and it wasn’t alone. Ping An Insurance Group added 5.2%, China Life Insurance rose 6.7%, PICC Property & Casualty gained 6.1% and New China Life Insurance rallied 12.6%.

Carlyle sold all its remaining 203.7 million shares, which accounted for 7.3% of CPIC’s H-share capital and 2.2% of the total share capital, including its Shanghai-listed A-shares. The shares were offered at a price between HK$30 and HK$30.30, which translated into a discount of 2.26% to 3.2% versus yesterday’s close of HK$31.

According to a source, the final price was fixed at HK$30.30 for a 2.26% discount. This was significantly tighter than the 5.2% discount that Carlyle achieved in its most recent sale in July last year, but wider than its first two sell-downs in December 2010 and January 2011. However, the first one of those early deals was privately placed, and more than 80% of the second one was bought by two anchor investors, which helped keep the price high.

This time the deal was backed by reverse inquiries from both long-only investors and hedge funds, which covered more than half the transaction at launch. One anchor investor in particular was said to have wanted a significant portion of the deal.

The majority of the overall demand came from hedge funds, but in the end the shares were distributed fairly evenly between hedge funds and long-only investors, the source said. Most of the demand came from Asia and the US, with some participation from investors based in Europe.

Contrary to its previous two sell-downs, Carlyle also chose not to invite competitive bids for this last sale, which could have tempted banks to offer a higher price than what the market was prepared to pay in order to get in on the action. Instead it mandated Goldman Sachs and UBS to do the trade based on the price that those two banks (independently from one another) had been suggesting to Carlyle.

While there are never any guarantees, particularly after stock markets in Europe and the US fell overnight, this should limit the risk of a sell-off in the stock today. The share price dropped 10% the day after Carlyle’s previous sell-down in July and lost as much as 16% before it started to head higher again in late September. But thanks to a recovery in the fourth quarter and last week’s gains, the stock is currently up 40% since the beginning of 2012.

The aftermarket performance assumes added importance since this is only the second block trade in Asia this year. If investors make money on the deal, they will be more inclined to take part in the next few transactions that hit the market.

There are a number of blocks in the immediate pipeline, according to bankers, including a few that were held over from last year and FIG (financial institutions) is expected to remain one of the most active sectors.

Either way, Carlyle will have made a handsome profit on its investment in CPIC, given that its initial investment in December 2005 amounted to only $410 million. This compares with the $5.2 billion that it has raised from the sale of its shares through five capital markets transactions since December 2010.

The US-based private equity firm initially invested in CPIC’s life insurance unit, but that investment was converted into shares in the parent company before it went public. CPIC listed in Shanghai in December 2007 and in Hong Kong two years later. Before Carlyle started selling down in December 2010, it held 57.2% of CPIC’s H-share capital.

Its initial sell-down was an $864 million private placement that was announced on December 29, 2010 — about one week after Carlyle’s 12-month lockup from the Hong Kong IPO expired. It was arranged by UBS and priced at a 0.6% discount.

Less than two weeks later, in January 2011, it raised $1.79 billion from a sale that was priced at a 0% discount to the latest close, or at HK$33.45 per share. Allianz and Fairholme Capital bought a combined 82.5% of the deal and Goldman Sachs was the sole bookrunner.

In July 2011, it raised $989 million from a deal arranged by Deutsche Bank, Goldman Sachs and Morgan Stanley, which was priced at a 3.3% discount. And in July this year it sold $723 million worth of shares at a 5.2% discount through Bank of America Merrill Lynch and Credit Suisse.

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