HONG KONG  - It turns out that Chinese tractors and British pizza are like chalk and cheese. Hony Capital is learning that lesson the hard way. The Beijing-based buyout shop renowned for successful investments in state-owned enterprises has run into trouble with its 2014 acquisition of PizzaExpress and other overseas deals. Straying too far can be difficult.

Under boss John Zhao, Hony made its name buying unloved government-backed companies. Over the course of a decade or so, the firm pumped more than $2 billion into some 30 such outfits. Heavy-machinery maker Zoomlion, for one, delivered a return of 18 times. That kind of performance attracted big slugs of foreign capital. Hony’s $580 million fund in 2006 led to one more than double the size a couple of years later; it then raised $2.4 billion in 2011.

With the cash rolling in, Zhao and his crew reckoned they could replicate their achievements elsewhere. Hony bought PizzaExpress for $1.6 billion in 2014, the same year it ventured into Silicon Valley and Hollywood. The idea of bringing the food chain to China flopped. One of its bonds is now trading at around 20 pence on the pound, and the Financial Times reports that debt holders are pushing Hony for a restructuring.

It’s not the only trouble spot. After film studio STX abandoned plans for a Hong Kong initial public offering last year, Hony joined private equity firm TPG for another equity injection. Hony also invested in office-sharing outfit WeWork in 2016 at a $17 billion valuation. Its IPO, too, has been scrapped, and SoftBank’s rescue deal slashes that figure by more than half.

Hony’s latest flagship funds – from 2008, 2011 and 2016 – are all tracking terribly. As of March, their internal rates of return were -4.2%, 5.4% and 4.5%, respectively, according to figures reported by California and Texas pension funds. That suggests distracting ambition has taken its toll.

The wave of SOE deals that Hony rode may have passed, but rivals also found a way to keep thriving while staying closer to home. Boyu Capital, for example, has delivered outsized returns by predominantly focusing on just four industries in Greater China. That’s a better outcome no matter how you slice it.

CONTEXT NEWS

- Bondholders in PizzaExpress, the UK restaurant chain owned by Chinese private equity firm Hony Capital, are pressing the company to engage in restructuring talks, the Financial Times reported on Oct. 8., citing unnamed sources.

- A restructuring could involve a debt-for-equity swap, with some investors and analysts advocating splitting the UK business from its underperforming international operations, the newspaper added.

- Hony bought PizzaExpress for about 900 million pounds in 2014 from British buyout firm Cinven.

(Editing by Jeffrey Goldfarb and Katrina Hamlin)

© Reuters News 2019