David Bonderman, founder of TPG Capital, says the $48 billion private-equity giant’s turnaround plan for Chinese sportswear company Li Ning needs time to come good.
Speaking at a recent conference organised by the Emerging Market Private Equity Association, Bonderman cited Li Ning as an example of the kind of value-adding operational experience TPG can bring to companies in emerging markets.
Because investments in emerging markets are unlevered and often in minority positions, private equity is more about improving company operations than about leverage, he explains. “In emerging markets, we rely on our ability to be agents of change in a business,” Bonderman says. “These markets are usually not lacking in capital, but they are lacking in talent.”
In the case of Li Ning, TPG and Government Investment Corporation of Singapore provided capital to the beleaguered company in 2012 in the form of a convertible bond and operational control. “We got invited in because we do things that others can’t,” Bonderman says.
Li Ning is a controversial example, though. The turnaround has yet to show results. The management had been destroying value for a while because it couldn’t focus on a strategy. TPG and GIC entered by financing a Li Ning $240 million convertible bond at a small implied conversion premium and, importantly, veto power over Li Ning’s ability to borrow further. The proceeds were meant to support the balance sheet and finance a turnaround plan.
However, the company announced a realised loss for 2012, citing problems with its distribution chain and growing inventory of unsold goods. The CEO was fired in July and the company breached its covenants on borrowing.
That has recently led TPG and GIC to renegotiate the bond so the conversion rate becomes a premium, and also won a pledge from the company to keep debt and new financing limited to strict levels. TPG and GIC are protected by a lower conversion price but other shareholders have had to endure seeing the share price fall from about HK$6.21 last January to HK$4.62 on May 21.
Bonderman, asked about the Li Ning deal, says TPG’s management strategy will see the company through eventually.