Leaning on the wrong people

By Paul Mackintosh - 25/02/13

Asia Pacific private equity seems to be coming out in a litigious rash. In Australia and New Zealand, units of Japanese beverages giant Asahi Group, Asahi Holdings Australia and Independent Liquor New Zealand, have reportedly brought suits in the Australian Federal Court against leading regional buyout firms Pacific Equity Partners and Unitas Capital over the sale of local brewing asset Independent Liquor, alleging misrepresentation of the earnings of the asset when it was sold in 2011. And now, in the US, a group of private equity and other fund investors is suing Big Four accountant Deloitte Touche Tohmatsu in the Southern District of New York, over its auditing of ChinaCast Education Corp, which delisted from NASDAQ in 2012 after failing to file a 2011 annual report. The defendants in both cases are vigorously denying wrongdoing, asserting that the allegations are without merit.

I’m not about to pass judgment myself on the merits of either case. The reported statement by Atsushi Katsuki, Asahi Holdings Australia MD, that Asahi both did its own thorough due diligence (DD) during the sale and relied on the data provided by the sellers seems somewhat schizophrenic, though. Surely the point of DD is that you don’t rely on the seller’s numbers, but do your own checks? And surely inflating earnings, the alleged wrongdoing, is exactly what buyers should be most alert for? In the Deloitte/ChinaCast case, remember that auditors are required to audit, but not necessarily to do detailed DD.

The cases do highlight, though, that for Asia Pacific assets of all kinds, buyers and investors need to tread carefully. They also highlight the dangers of letting greed get away from you when chasing Asian growth. Japanese companies in particular have been preferred buyers in trade sales for years, with a reputation for overpayment dating back to SoftBank, as they seek to buy growth outside moribund Japan. It illustrates the old adage that something is worth what you are willing to pay for it, and rosy expectations can really skew your sums. As for China, cross-border structuring, relation of offshore vehicles to underlying assets in the PRC, international enforcement and access to Chinese company information have been grey areas that investors have worked through for years to gain access to underlying growth. Investors should know that story well enough by now.

So pay in haste but repent at leisure, and don’t expect the courts to heal your buyer’s remorse.