Photographer: Anthony Kwan/Bloomberg

Chinese Shadow-Banking Tycoon to Scale Back Buyout Fund

  • ZZ Capital senior executives negotiating severance packages
  • Dealmakers were drawn by access to nearly $5 billion funding

ZZ Capital International Ltd., the private equity firm controlled by Chinese shadow-banking tycoon Xie Zhikun, is preparing to dramatically scale back its operations, according to people familiar with the matter.

A number of senior executives at the Hong Kong-based fund, including at least two seasoned dealmakers brought in from global advisory firms, are currently negotiating severance packages, the people said, asking not to be identified because the discussions are private. A core of less than 10 people will likely remain at the firm’s headquarters after the Chinese New Year holiday in mid-February, they said. 

Dealmakers who joined ZZ Capital International had been told they would have access to nearly $5 billion for acquisitions over a three-year period, the people said. The executives are set to depart without completing a single major deal, after the fund announced a delay this month in the closing of a U.S. acquisition.

ZZ Capital International is scaling back less than two years after Xie bought control of the Hong Kong-listed firm and hired veteran investment banker Michael Cho as chief executive officer. Much of Xie’s wealth stems from China’s $15 trillion shadow-banking industry, which has recently been the target of a renewed government crackdown aimed at cutting leverage in the financial system.

“Steps have been taken to make a number of redundancies in the Hong Kong office, but these will have no impact on daily operations,” a representative for ZZ Capital International said Tuesday in an emailed response to Bloomberg queries. “Other group operations and teams in the U.S. and U.K. remain unchanged.”

ZZ Capital International employed 64 people at the end of September, an exchange filing shows.

Tightened Regulation

The situation is fluid, and details of ZZ Capital International’s future strategy could change, according to the people. A representative for Xie’s main investment arm, Zhongzhi Enterprise Group, declined to comment. Cho couldn’t immediately be reached for comment.

ZZ Capital International warned in November it had become “more selective” as a result of China’s tightened currency controls and heightened regulation over Chinese outbound acquisitions. The fund has started discussions with external financial institutions to diversify its capital sources, it said in its interim results announcement that month. 

Revenue at ZZ Capital International fell 89 percent in the six months ended September, leading it to swing to a net loss. Operating expenses for the period nearly doubled from a year earlier, mostly due to increases in staff costs and rental expenses.

Xie bought control of a small Hong Kong restructuring advisory firm in early 2016 and renamed it ZZ Capital International. He proceeded to hire a string of high-profile dealmakers including Cho, who was poached from Qatar’s sovereign wealth fund.

The banker, who used to head Asia mergers and acquisitions at Bank of America Corp.’s Merrill Lynch unit, brought some former colleagues from the investment bank to join him at ZZ Capital International, according to the people with knowledge of the matter. ZZ Capital International also hired executives from Bain Capital and KKR & Co.

Delayed Payments

Before taking over ZZ Capital International, Xie helped build Zhongrong International Trust Co. into China’s third-largest trust firm, profiting as the company arranged sales of debt-like savings products that help property developers and local governments raise funds from millions of Chinese investors. Zhongrong this month delayed payments to investors on two products tied to local government borrowings, people familiar with the matter have said

The funds were later repaid, according to a statement. Xie’s holding company owns about 33 percent of Zhongrong, the trust firm’s annual report shows.

This month, ZZ Capital International extended the termination date for its pending acquisition of U.S. energy indexing business Alerian, which it agreed to buy in July for as much as $812 million. Additional time is needed to fulfill the conditions of the purchase, it said in a Hong Kong stock exchange filing. ZZ Capital International will be required to pay a fee if the deal is scrapped due to a financing failure, according to the statement.

— With assistance by Jun Luo

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