One of the biggest trends in raising money is private equity. In reality, private equity has been around for generations, but it has been enhanced over the past 20 years. In the textbooks, when a company needs to raise money it has a number of choices including bonds and equity. Often times going to the equity markets was considered the company would raise more money. The thing that has changed is there are a number of private equity firms that can raise as much and sometimes more than public markets. If a company went public, a wide number of investors could invest in the company, in private equity – the company takes positions but they are much more concentrated and if the company goes through a restructuring and comes out better, there is greater amounts of money to be made in a shorter time period.

An interesting book dealing with private equity is a book called Money Machine by Weijian Shan published by John Wiley & Sons, New Jersey, 2023.

In the book, Mr. Shan works for TPG and recently had worked on a deal to transform a South Korean Bank ( Korea First Bank) from needing government bailouts to profitability. The bank was in good shape and people in the Asian markets recognized efforts by the TPG group. One of the people who recognized it was Alex Zhang, a partner at Dorsey & Whitney with offices in Minneapolis and in Hong Kong. Mr. Zhang asked would Newbridge Capital, the prior name of TPG) would be interested in buying a bank in China?

The bank in China was Shenzhen Development Bank (SDB), it had nationwide abilities and was headquarters in Shenzhen, a city across from Hong Kong.

Similar to all banks that are in trouble the Non-Performing Loans (NPL) was a large percentage of the outgoing operations of the bank. Commercial banks make money by capturing the difference between the average interest rate at which it lends money and the average interest rate at which it collects deposits. The difference between the 2 is called the spread. Ideally it is positive.

The are 2 major costs to consider – operating costs: compensation, paying rents, utility bills, etc. Credit costs is the other, which refers to loan losses. If these costs are greater than the spread it earns, the bank losses money.

In China it is relatively easy to get to a framework for a deal, but then comes the regulatory process. The many details including the governments of Shenzhen, Guangdong Province, and Beijing. Before Beijing would sign off, the regulatory groups included the central bank, the securities regulator, the Ministry of Finance, the State Council and ultimately the Prime Minister.

Each body would need both data and information from TPG and political approvals. It was going to be an interesting ride. Most of the book is the process to gain approval and it was a roller coaster ride with many ups and downs. Once TPG was able to buy the bank, then more work started.

Who do you trust? One of the steps was to do a 360-degree performance review process. Every one of the 7,000 employees would be reviewed and evaluated by the people around them including superiors, subordinates and colleagues. Evaluations are kept as anonymous to ensure fairness and honest as possible. It too 2 weeks to get the results. The purpose – the bank’s employees knew who the best managers were, and given the right outlet, they were willing to tell us.

Chinese banks were organized like a federation of regional fiefdoms. There was a major branch in the capital of each province, which functioned like a regional headquarters controlling a number of sub-branches throughout the province.

SDB had a high ratio on NPLs in general. But the bad loans were unevenly spread. What caused the uneven spread of NPLs?

Clearly the managers of the SDB branches made the difference. If a branch manager was good, the branch booked good loans and avoid the bad ones – even in a bad market.

The other factor was the SDB’s organizational structure. The provincial branches operated with their own lending standards and made their own credit decisions – with a wide range of results. From this point of view of international best practices, the whole bank should have a uniform credit underwriting standard. Fortunately, there was good man to lead the transition.

The Strategy and Policy Committee met for the first time with a mandate to create a new organizational structure and change management at various branches. How fast should the change be? never an easy answer but Mr. Shan believed major surgery was needed.

Mr. Shan let the results of the 360-degree reviews guide the personnel decision. Given the past method, most people bought into the changes as merit and performance were important.

A town hall meeting was asked and Mr. Shan asked the question – how many of you think our bank ranks as the best bank in China? none. the middle -20%, the bottom – a majority.

A culture change of a sense of ownership would be undertaken, additionally the incentive system would be changed.

The loans were effectively broken into 2 banks – the good one and the bad one. The good ones allowed the bank to grow; the bad banks would focus on recovering of outstanding debt.

There are other insights into operations of the bank and the exit or the selling of the bank to a new company PAIG Insurance which grew the bank, but selling at the right price takes time and discipline.

Linking to dividend paying stocks, when you read or if you ever gone through restructurings, hopefully you stayed on, you will learn and resort to the fundamentals of the business. As a dividend paying investor, your companies are not supposed to be dealing with restructurings except to bring them into the bigger company, but you can ask the questions that pertain to restructurings to see if you believe the company is getting it right.

There are more questions than answers, till the next time – to raising questions.