I recently returned from speaking at the OIIF Conference held in Beijing and thought to share a few observations:
1. The issue of retrogression and the quota cap on Chinese investors was by far the greatest issue discussed by all. Ron Klasko opened the conference and did a very good job of explaining the issues to the audience in a manner that was easy to understand.
Following his remarks were a number of questions from the agents regarding the timeline and expected delays as that proved to be a source of concern for all in the room.
Ron and other speakers urged all of those who had clients considering making an investment to proceed as soon as possible as the delays could become significant in the not too distant future and may even affect the ability to remove conditions and the repayment of capital with the extended delays and timelines.
OIIF Conference Co-Organizer Max Chang asking the panel a question
2. Next came the issues of fraud, misrepresentation and the need for due diligence by agents, attorneys and investors on the asset development plans as outlined in the offering documents, assumptions made concerning revenues & expenses, development timelines and job creation as well as the performing background checks on the control persons and principals responsible for executing that development on time and budget.
If experience is any guide, very little, if any of this was done in the past and it is of great concern to the risk averse Chinese that have traditionally relied solely on the representations made by migration agents who have significant conflict of interests issues related to their non-disclosed compensation arrangements with their clients.
This need for increased due diligence was heightened by the recent action involving the SEC action involving LA based attorneys Lee & Kent and their promotion of an ethanol based investment that we reported on earlier in the month
According to the report of the indictment by the Los Angeles Division of the FBI, a federal grand jury in Santa Ana returned a nine-count indictment that alleges Lee took approximately $47 million from 94 foreign investors. The indictment alleges that Lee used advertisements in foreign newspapers and other means to solicit Korean and Chinese nationals to invest $500,000 each, plus another $40,000 for administrative and legal fees. Lee guaranteed small annual returns on the investments, as well as “green cards” for the foreign nationals. But, according to the indictment, Lee did not make the investments in purported biofuel production facilities and he submitted bogus paperwork to U.S. Citizenship and Immigration Services, which administers the EB-5 program.
I tried to meet with Lee & Kent in 2008 and was refused entry to their offices during the course of our due diligence investigations into the program and operators. At that time they were the only entity with two designated Regional Centers, and were a rarity in the program among the other 13 regional centers established. Their refusal to see me or answer my questions and my concerns about the entity and them were later reported in the Hutch News
Of course the Chicago Convention Center was discussed as well as the recent bankruptcy of the South Dakota Meatpacking plant, but my impression is that the Chinese agents and investors view these as anomalies related to schemes which they were not told about and were unable to detect, not a failure of them to perform adequate or even reasonable due diligence on the investments or the principals and control persons.
I discussed our approach to doing due diligence on the principals and investment as outlined in the offering documents, business plan and economic impact analysis and urged the agents and attorneys to exercise heightened caution as many of the projects which we review contain inconsistencies, errors, cost and revenue projections which are not in line with the market or based on reasonable assumptions as well as unrealistic development timelines.
It has been apparent to me that the Chinese market is much more concerned with appearances and "name-branding" by project developers and promoters than by doing institutional asset valuation and risk assessments, but that may be slowly changing as the number of projects fail to create the necessary jobs in line with the business plan projections and fail to return capital and the Chinese investors look for remedy against the promoters.
I handed out our Mandarin Due Diligence checklists in the hopes that would help illustrate the complexity of performing private equity analysis on commercial real estate and other asset development given the illiquidity of the LP positions and the artificial job creation and timeline constraints imposed on the developers by USCIS.
The last issue of significance discussed was the large number of Regional Centers and projects coming online and seemingly all in China looking for investors. This has put the large Chinese migration agents in position of influence as they can basically dictate which projects get funded and which don't as well as lucrative commissions and fees from the Centers and developers.
The smaller, newer Centers appear to be frustrated with their lack of access to the large agents, or the fees being imposed to both market and compensate them as the agents and market, in the wake of the frauds and failures, appear to be going more and more for Centers with a long track record of I-526 and I-829 approvals as well as backing by well known brands, developers and operators.
This has left many of the smaller project to sweep up the crumbs of what is left over after the mega-centers have completed their marketing campaigns and if it is any indication of the trend in the market, only appears to be getting worse as the capital concentration of the top 10 Regional Centers appears to greatly exceed the combined raise of the remaining 590.
That is not welcome news to all of the newly minted RCs out there, but appears to be the impression I got from many who were in attendance pitching to the agents who appeared to be mostly concerned with track records and the name recognition of the developers. Bigger is definitely better in China.
My thanks to Max and Julia for inviting me to the conference, it was very well organized and I appreciated the opportunity to meet many of those who attended.