Celebrities are questionable assets in private equity
By Paul Mackintosh - 27/08/12
In the latest twist in the rapid and convoluted development of China’s RMB private equity sector, Yao Ming, former globe-spanning NBA star and sporting millionaire, is reportedly building a new career as a general partner, according to Guangzhou’s 21st Century Business Herald. The reports state that, following his takeover and rebranding of an existing firm, Chongqing Yitai Equity Investment Fund, as Hongyuan Equity Investment Fund in August 2011, the former National Basketball Association giant has partnered with his agent to create D&F Capital in a groundbreaking sports-focused fund. The total targeted AUM for both firms is reportedly around US$1 billion.
Sports and private equity have enjoyed a chequered (pun intended) relationship over the decades, typified by CVC Capital Partners’ involved relationship with Formula 1, which almost went IPO in Singapore earlier this year. US and other sports stars have gone into the private equity game. Celebrated San Francisco 49ers defensive back Ronnie Lott founded fund of funds HRJ Capital with former 49ers teammate Harris Barton in 1999, accumulating up to $2.4 billion of assets at its height and bringing on board yet another teammate, Joe Montana, as a partner in 2003-05, while managing personal commitments from other US sports stars such as Barry Bonds and Peyton Manning. However, HRJ’s fate is not a happy augury for Yao Ming’s prospects. The US Securities and Exchange Commission reportedly began an investigation into the firm in November 2011 regarding alleged irregularities in its handling of its finances after the 2008 crisis, prior to its sale to Swiss fund-of-funds major Capital Dynamics in mid-2009.
Yao Ming arguably is one more member of China’s new rich with every right to put his money to work in the fashionable RMB PE asset class. As six-time leader of Forbes' annual Chinese celebrities list, with personal earnings of $51 million for 2008 alone, he certainly has the wealth to deploy. But his involvement does nothing to allay concerns about the over-driven, fashion-conscious and even anarchic character of much current RMB private equity fundraising. Yao Ming has apparently led fundraising drives in Chongqing for his new firm, using star cachet in much the same way that the HRJ GPs traded on their sports careers to gain access to general partner and investor circles. And according to China Daily and other sources, Yao Ming installed business associates in key positions at Hongyuan Equity following the takeover. Fund terms, transparency, controls, accountability and other structural basics of these entities are all unclear.
Anxious market observers have been warning for a while of the risk of a Madoff-style bust in China’s mushrooming RMB private equity sector. Yao Ming will likely not be the instigator of such a debacle, but his jump to general partner status is likely a sign that it may have come just that little bit closer.