It was billed as the biggest private financing deal in the history of China.
In September 2012, the Alibaba Group announced that it had completed a US$7.6 billion deal to buy back half of Yahoo’s stake in it. The giant e-commerce company raised part of the money by selling shares to select investors, notably China’s sovereign wealth fund and three prominent Chinese investment firms.
What Alibaba did not mention was the deep political connections of the investment firms, Boyu Capital, Citic Capital Holdings and CDB Capital, the China Development Bank’s private investment arm.
Their senior executive ranks included sons or grandsons of the most powerful members of the ruling Communist Party, according to an analysis by The New York Times. Documents reviewed by The Times also show that a fourth investor bought Alibaba shares that month: New Horizon Capital, a private equity firm cofounded by the son of China’s prime minister at the time, Wen Jiabao (溫家寶). The new revelations only demonstrate the paucity of information about existing shareholders in what is poised to be the biggest initial public offering of this year.
As part of its regular filings for the offering, Alibaba disclosed the owners of about 70 percent of its shares. The group includes big foreign investors like Yahoo and the Japanese communications company SoftBank, as well as top executives such as Alibaba’s chairman Jack Ma (馬雲) and its vice chairman Joe Tsai (蔡崇信).
However, less is known about other shareholders whose sway may be significant even if their stakes are not. The situation raises questions about the transparency and operations of Alibaba, which is set to go public in the US in the coming months.
“It would take, at this point, a seismic effort to topple an Alibaba,” said Anne Stevenson-Yang (楊思安), a cofounder of the Beijing firm J Capital Research, which specializes in detailed analysis of Chinese companies. “They’ve got so many different allies across so many different ministries.”
Such politically connected investors will most likely reap a bonanza when Alibaba goes public, an offering that analysts estimate could value the company at more than US$200 billion. At that level, even a 1 percent stake would be worth US$2 billion. Already, their investments have performed spectacularly well.
New Horizon Capital reported that at the end of 2013 the value of its Alibaba stake stood at 3.73 times the cost of its initial investment, according to the documents —financial statements from one of New Horizon’s investors, the Cayman Islands-registered partnership Legacy Capital.
By that measure, the US$400 million investment in Alibaba made by a subsidiary of Boyu Capital gained more than US$1 billion in the same time period. Boyu counts former Chinese president Jiang Zemin’s (江澤民) Harvard-educated grandson Alvin Jiang (江志成) as a partner.
In a country of more than 1.3 billion people, the fact that four Chinese companies investing in Alibaba have had executives who are either sons or grandsons of the two dozen men who have, since 2002, served on the Politburo Standing Committee, the most elite group of leaders, illustrates how deeply China’s political class has attached itself to the highest echelons of finance. For example, The Times reported in 2012 that Wen’s relatives, including his son Winston Wen (溫雲松), who cofounded New Horizon Capital, controlled assets worth at least US$2.7 billion.
Connections are key
Such connections matter. They help secure deals, potentially giving companies an advantage in a highly competitive business environment.
Corporate ties to these so-called princelings have also attracted the attention of law enforcement authorities in the US. Investigators at the Securities and Exchange Commission (SEC) and federal prosecutors in Brooklyn are looking at whether a JPMorgan Chase program called Sons and Daughters, under which it hired relatives of senior Chinese officials and top company officials, violated the Foreign Corrupt Practices Act. Other banks are under investigation for similar programs.
JPMorgan and the other banks have not been accused of any wrongdoing. To run afoul of the American law a company must act with “corrupt” intent or with the expectation of offering a job in exchange for government business.
In Alibaba’s case the ownership stakes are tangled in layers of shell companies that shift from one Caribbean tax haven to another.
Some of Boyu’s shares are held through one of its subsidiaries, Athena China Ltd, which is set up in the British Virgin Islands. Athena is controlled by another offshore entity, Prosperous Wintersweet BVI, which in turn is owned by the Cayman Islands-registered Boyu Capital Fund I, Alibaba reported to the SEC.
Legacy Capital was set up in 2011 and as of the end of last year, its main assets included holdings in Boyu Capital Fund I, New Horizon Capital IV and Athena China, all of which held Alibaba shares.
With such an intricate web, it is hard to get a complete picture of Alibaba’s ownership structure.
For example, the Legacy Capital documents disclosed Athena China’s US$400 million investment in Alibaba shares. However, they did not detail the additional Alibaba stakes held by Boyu and New Horizon.
New Horizon was not part of the September 2012 Alibaba financing arrangement and most likely acquired its holding from existing shareholders, according to a person with knowledge of the transaction, who declined to be identified because of the sensitivity of the issue.
Robert Choi, a director of Legacy Capital in Los Angeles, did not respond to a request for comment.
An Alibaba spokeswoman in Hong Kong said the company was in its so-called quiet period before the public offering and was not able to comment.
Adding to the complexity of the structure, most of Alibaba’s new investors in 2012, including the sovereign wealth fund Citic Capital and CDB Capital, were also state-owned. In the case of the government-owned China Development Bank, the relationship goes even deeper. The bank lent Alibaba US$1 billion to help it buy Yahoo’s stake. For Alibaba, the connections go to the highest levels of government.
In September 2012, He Jinlei (賀錦雷),l — whose father He Guoqiang (賀國強) was then the Chinese Communist Party’s top anti-corruption official,l — was a vice president at CDB Capital, said two people familiar with the company who spoke on the condition of anonymity because of the sensitivity of the issue.
At the time, the China Development Bank was headed by Chen Yuan (陳元), the son of China’s former top economic-planning official Chen Yun (陳雲), who was a member of the Politburo Standing Committee from the 1930s into the 1980s.
The younger Chen stepped down last year as chairman of the bank. The younger He was still at the firm as of this year, according to accounts of his activities on company websites.
Citic Capital is one of the investment arms of the state-owned conglomerate Citic, which owns stock brokerages, banks, mines, steel mills and oil fields. Another unit of the company, Citic Private Equity Funds Management, was led until mid-2012 by Liu Lefei (劉樂飛), whose father Liu Yunshan (劉雲山), China’s top propaganda official, ascended to the Politburo Standing Committee that November. The younger Liu was named vice chairman of Citic Securities this March.
Jeffrey Zeng(曾之杰), a senior managing director at Citic Capital, is the son of the country’s former top planning official Zeng Peiyan (曾培炎 ), who was a member of the Politburo, l — the group normally with about 25 people, from whose ranks the elite Standing Committee is drawn.
Wang Jun (王軍) , 73, the son of Wang Zhen (王震), a former vice president, was a longtime chairman of Citic. His father was, along with the elder Chen, one of the “eight immortals,” the group of Communist Party elders who guided the nation in the 1980s. The younger Wang was, until this year, chairman of another company that Citic had invested in, the pharmaceutical-data firm Citic 21CN. In January, Alibaba and an investment fund founded by Ma, Alibaba’s chairman, acquired a majority stake in Citic 21CN.
A representative of Citic Capital said the company did not comment on its investments and that Liu headed another division of the company. Representatives of CDB Capital and Boyu Capital did not comment.
Alibaba says it relies on markets not connections
The Alibaba Group responded on Monday to an article in The New York Times about the political connections of some of its shareholders, saying the company relies on the market, not on the background of any of its investors to drive its business.
An article published on Monday in The Times reported that the three Chinese investment companies helping Alibaba finance a US$7.6 billion deal to buy back half of Yahoo’s stake in it, employed sons and grandsons of some of the most powerful politicians in the ruling Communist Party. The article said that Alibaba had not disclosed the ownership stakes of these politically connected firms and said a fourth company, cofounded by the son of former prime minister Wen Jiabao (溫家寶), also acquired a stake around the same time.
In a strongly worded statement on Monday, written in Chinese via its account on Weibo, a Twitter-like social media network, Alibaba said The Times article “mistakenly described” Alibaba’s relationship with the investors.
“To those outsiders who stress companies’ various ‘backgrounds’, we didn’t have them before, we don’t have them now, and in the future we won’t need them!” the company said in the statement.
The statement did confirm that the three companies highlighted by The Times held small, but significant stakes in Alibaba.
The statement was made available to readers in mainland China, where The Times’ website has been blocked since late 2012. Thus, most readers in China would not have been able to view the original article that Alibaba was responding to.
Alibaba said that the three Chinese investment companiesl — Boyu Capital, Citic Capital Holdings and CDB Capitall — had acquired their stakes in 2012 at a time when “global capital markets were depressed” and there were few companies that wanted to invest. Alibaba said their stakes were relatively small. At the end of June, Boyu Capital held 0.55 percent of Alibaba’s common shares, Citic Capital held 1.1 percent and CDB Capital held 0.47 percent.
Alibaba’s initial public offering in New York, anticipated later this year, is expected to value the company at US$200 billion. That would put the combined value of the three companies’ stake at more than US$4 billion.
One of Boyu’s partners is Alvin Jiang (江志成), the grandson of China’s former President Jiang Zemin (江澤民). Another branch of Citic Capital’s parent, the conglomerate Citic, employs Liu Lefei (劉樂飛), the son of Liu Yunshan (劉雲山), the country’s propaganda chief, whilst CDB Capital employs He Jinlei (賀錦雷), the son of a former Communist Party discipline chief, He Guoqiang (賀國強).
Many businesses find that such connections are often critical to the success of companies doing business in China by helping secure deals and giving companies a leg up.
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