Becoming China's KKR is even harder than it sounds

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By Alec Macfarlane

HONG KONG, Feb 15 (Reuters Breakingviews) - It"s not easy being Henry Kravis. A private equity firm with ambitions of building China"s answer to KKR is off to a rocky start. ZZ Capital International, backed by billionaire Xie Zhikun, just lost its chief executive. Competing in buyouts internationally is even harder than it sounds.

Michael Cho - who decamped this week because of an illness in the family - joined ZZ Capital International in 2016 after nearly two decades at Bank of America, including leading the Asia M&A business, and a few years at the Qatar Investment Authority. He told the Wall Street Journal he wanted to run with the likes of KKR. Cho started with a small Hong Kong-listed investment firm and recruited executives from Morgan Stanley and Bain Capital - as well as one from KKR to run Europe.

With new targets on the back burner, ZZ Capital International is shrinking its Hong Kong team and seeking offshore funds to finance the existing deal pipeline. Its tycoon backer owes part of his fortune to loans to small businesses. That sort of shadow banking, however, is another area under scrutiny by Beijing authorities trying to curb leverage throughout the financial system.

It all points to the difficulties of establishing a global private equity powerhouse. There are a handful of homegrown success stories in Asia, such as Hillhouse and PAG, but it"s a business best started small with a diverse pool of investors and a local area of expertise.

There"s no shortage of buyout wannabes in Asia. Nearly a third of the $38 billion raised for first-time funds in 2016 was done by managers in China and Hong Kong, according to research outfit Preqin. Given the experience at ZZ Capital International, they"ll be wiser to aim more carefully before setting their sights on Kravis.

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CONTEXT NEWS

- Michael Cho resigned as chief executive of ZZ Capital International, effective from Feb. 15, the Hong Kong-based private-equity firm said on Feb. 9.

- ZZ Capital International said Cho, the former head of Asia mergers and acquisitions at Bank of America Merrill Lynch, resigned because of "relocation due to illness in the family". He will be replaced by Zhang Yun, a 32-year old executive director at the company.

- The firm was preparing to dramatically scale back its operations, and a number of senior executives were negotiating severance packages, Bloomberg reported on Jan. 30. The ZZ executives were told they would have access to almost $5 billion for deals over three years, but are set to leave without completing a single major acquisition, the report said.

- ZZ Capital International is part of Chinese billionaire Xie Zhikun"s Zhongzhi Enterprise Group, a private, Beijing-based asset manager that says it has more than $200 billion under management. It was formed in 2016 after a unit of Zhongzhi acquired Hong Kong-listed investment-holding company Asian Capital Holdings, which was later renamed ZZ Capital International.

- Cho told The Wall Street Journal in 2016 he wanted ZZ Capital to challenge the world"s biggest private-equity firms, including KKR, using billions of dollars he said Xie would provide, the newspaper reported.

ZZ Capital Internationalstatement

ZZ Capital International third-quarter earnings (graphic).



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