When US private equity group Blackstone announced in June that it would buy International Data Group, a media and research company based in Massachusetts, private investors in China followed the news nervously.
The $ 1.3 billion transaction, closed on Wednesday, will move funds to China Oceanwide Holdings, the former owner of IDG and a real estate developer with an international presence and a string of unpaid debts.
The sale is a rare link between global dealmaking and the plight of retail investors exposed to China’s vast real estate industry, where developers like Evergrande and Kaisa struggle to pay billions in debt.
Oceanwide’s cash needs also highlight the risks in China’s vast wealth management industry, where some property developers have raised funds without always disclosing the amounts in their financial statements.
Oceanwide investors claim that investment products they bought from the company’s subsidiaries last year were not repaid when their financial health was already under tremendous pressure – saying that money from the IDG sale would be used towards the repayment .
“For investors, IDG is the last hope,” said an Oceanwide wealth management product owner who said he hadn’t heard of Blackstone before and asked how much of the proceeds would be available to him. Another suggested the “hole is too big”.
Some investors said they have filed official complaints with authorities in China, including the China Securities Regulatory Commission and an economic investigation department of the Shanghai Police Department.
Oceanwide declined to comment.
Oceanwide acquired IDG in 2017, during a period of ambitious overseas expansion reflected across China – led by conglomerates such as HNA and Dalian Wanda – that left the company with significant US real estate holdings.
But the group has gotten into financial trouble for the past two years, culminating in the seizure of its San Francisco assets by creditors in October. Tight real estate debt restrictions imposed by Beijing, brought to the global spotlight by Evergrande’s recent plight, have also made it difficult for Oceanwide and its competitors to raise money and meet commitments.
Problems with wealth management products related to developers have even sparked social unrest. In September, angry investors flocked to Evergrande’s Shenzhen headquarters to protest delays in payments on the wealth management products it guarantees.
Another developer, Kaisa, recently confirmed that the investment products it guarantees are failing to pay. The rating agency Fitch found this month that the company was not posting the products in its annual financial statements.
In addition to the difficulties, there were defaults on international bonds from several companies. “We expect defaults by Chinese developers to increase over the next six to twelve months,” said Edward Chan, an analyst at S&P.
Oceanwide, which was run by billionaire founder Lu Zhiqiang until 2020, became a financial conglomerate with real estate developments in New York, Hawaii and San Francisco alongside its mainland projects.
But at the beginning of 2019, the auditor PwC resigned. The Group’s financial health continued to deteriorate during the coronavirus pandemic, and S&P and Fitch suspended their bonds at the company’s request in March 2020.
PwC declined to comment.
The San Francisco project was seized after bonds valued at around $ 330 million matured and another Oceanwide subsidiary failed in May. A long-standing attempt to acquire Genworth Financial, a US insurer, failed in April prior to the sale of IDG. Blackstone declined to comment.
In its final report on Oceanwide early last year, S&P downgraded its rating to Triple C and warned of the “increasing risk of repayment on Oceanwide’s short-term maturities.”
However, Oceanwide continued to market onshore wealth management products in 2020 through a company called Oceanwide Investment Fund Management, a subsidiary of Minsheng Wealth, a financial services company wholly owned by China Oceanwide Holdings.
The 75-page offer for a product, released in November 2020, stated that the proceeds would be invested in the general credit markets.
Investors said payments largely halted in February. In July, Oceanwide posted a repayment plan on its account on WeChat, the Chinese messaging platform, that would result in full payment by March 2022.
A 39-year-old investor who claims to have spent Rmb 3 million on a wealth management product recommended by a friend said local authorities had “gone to great lengths to prevent investors from organizing”.
Another investor in a major city in eastern China said that after the payments stopped and the problem was reported to the police, the government was monitoring them. When they traveled to Oceanwide headquarters in Beijing, they said they were followed by seven officers from their hometown.
“The local government has invested a lot in making us behave rather than solving our problems,” the person said. “That’s because if we keep reporting our case to the central government, they could be punished.”
Reporting by Thomas Hale in Hong Kong, Sun Yu in Beijing and Wang Xueqiao in Shanghai