The Obscure Chinese Hedge Fund Making Big Enemiesby and
An activist investor in the making takes on Internet firms
Liang Jian's critics call him a noisemaker and lightweight
Activist investing isn’t a thing in China. It’s culturally frowned upon to be that confrontational. Liang Jian, a journalist-turned-hedge-fund manager, is on a mission to change that.
Not that Liang, or Nick as he’s known in international circles, would ever be confused with the likes of the brash American activist investors -- the Bill Ackmans and Carl Icahns and Dan Loebs. He’s a newbie with a war chest that’s a fraction of theirs and zero experience in the kind of epic battles for boardroom control that have made those men so famous.
But what Liang, 40, has begun doing -- trying to block Chinese companies from buying back all of their U.S.-listed shares on the cheap -- constitutes perhaps the boldest foray yet into the realm of activist investment in the Asian nation. His tactics have raised eyebrows in Beijing’s tight-knit investment and corporate community and earned him scores of admirers and enemies in the process. He’s been called a barbarian, spoiler and lightweight who lacks the financial resources to carry out the kind of counter-offer he’s proposing.
Liang is undaunted. “We have to fight for ourselves.”
As he tells it, he never intended to become an activist investor when he founded iMeigu Capital Management Ltd. three years ago. He was just looking to manage a little money for himself and a handful of clients with a focus on Chinese Internet stocks traded in New York and Hong Kong. But as corporate executives started putting up a record $31 billion last year to buy back these U.S.-listed companies, often with an eye to resell them in China at higher prices, Liang was taken aback. Not only were most of the offers at deep discounts to the IPO prices from just years earlier, but in some cases they didn’t even match their recent market levels. Somebody, he figured, needed to stick up for minority shareholders.
Two deals struck him as particularly troubling.
Last July, the top executives at E-Commerce China Dangdang Inc., once considered the country’s answer to Amazon.com Inc., said it wanted to repurchase all the shares in the open market for 16 percent less than their average over the prior three months. By that measure, it’s the lowest offer made by any Chinese company seeking to pull its shares off the U.S. market since 2003.
Then in February, the founder of online cosmetic retailer Jumei International Holding Ltd. said he was leading a group looking to buy back all outstanding shares for $7 a piece, less than a third of the IPO price back in 2014. The bid was so low that the company’s $402 million in cash and equivalents would almost be enough to cover the buyout costs.
The obstacles facing disgruntled minority shareholders are stark.
Through a complex ownership structure, the Chinese management groups tend to control the vote on these deals. And legal challenges are complicated too, given that most of the companies are incorporated in the Cayman Islands, where local law is seen offering little protection to minority shareholders.
That didn’t stop Liang from unleashing a torrent of lawsuit threats against Jumei’s leadership in a widely publicized statement in late February. He said he’s working with other minority shareholders to compile their complaints. In the feud with Dangdang, he’s hatched a more developed plan, having put together a competing acquisition bid that, at a valuation of $468 million, is 13 percent higher than management’s offer.
Press officials at Dangdang didn’t respond to e-mails and phone calls seeking comment on the transaction. Jumei officials declined to comment.
The Jumei buyout group had called its offer “attractive” back in February, months after founder Leo Ou Chen complained that the company was being “seriously undervalued” by U.S. investors. And in a statement accompanying their bid last year, the chairwoman and the CEO of Dangdang said the proposal provided “superior value” to shareholders and noted how it was higher than the previous day’s close, an argument that’s been echoed by pundits unsympathetic to Liang’s cause.
Many of his critics have openly doubted he can come up with the money needed to fund his counter-offer for Dangdang, a perception he’s tried to squelch by teaming up with industrial conglomerate Jiangsu Huaxi Group Co. on the deal. “IMeigu is just a noisemaker,” said Jun Zhang, head of China research at Rosenblatt Securities Inc. in San Francisco. “It won’t have much substantial impact. They are probably doing this for the fame.”
To many fellow minority shareholders, though, Liang is something of a hero.
“It’s a bold move,” said Peter Halesworth, the founder of Heng Ren Investments, a Boston-based firm that invests in Chinese companies listed overseas. “We appreciate it and other investors should appreciate it. We need investors to raise their voices and push back against low-ball offers.”
Rice and Bananas
Liang was born and raised far from the financial centers in China’s north.
The son of rice and banana farmers from a small village in the heart of the country’s southern industrial base, he became the first member of his family to attend college when he made the 1,000-mile journey to the Chengdu University of Technology. He’d go on to try his hand at a couple different jobs before breaking into journalism and deciding with a colleague to launch their own financial news website. They named it Xueqiu -- Chinese for snowball, a nod to the book that chronicled the life of their hero Warren Buffett -- and scored financial backing from Sequoia Capital. That success in turn led Liang and one of his Xueqiu colleagues to try investing itself in 2013, when they founded iMeigu in Beijing.
The timing was fortuitous. China’s Internet industry was booming and many of the companies were flocking to the U.S. market to go public. IMeigu’s lone fund has returned 55 percent from its inception, according to data compiled by Bloomberg through the end of March. (That’s triple the gains in the CSI Overseas China Internet index over that time.) Today, the hedge fund employs a half-dozen people and manages what Liang will only say is a figure in the “tens of millions of dollars.”
As the Dangdang and Jumei disputes drag on, Liang doesn’t rule out taking on other corporate executives. More and more Internet firms are pulling their shares out of New York and looking to list back in Shanghai or Shenzhen, a trend driven in part by the Chinese government’s push to support the technology industry.
For Liang, raising opposition to these deals isn’t just about eking out a few extra dollars here and there. It is, as he says, “a test of our survival.” For if companies threaten to exit the U.S. whenever their stock prices take a dive, iMeigu’s market niche would eventually disappear, taking with it, perhaps, China’s nascent activist-investor movement.