WSJ x Capital in English

ChinaDie rätselhafte Übernahme von J.D. Power

Wolkenkratzer in Hongkong
XIO hat ein Büro im International Commerce Centre in Hongkong


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A plan for the sale of the car-rating business J.D. Power was a month old when the seller, New York-based information giant S&P Global Inc grew uneasy. It wasn’t quite sure to whom it had agreed to sell the company.

“I wanted to raise a point with you that is causing our team here some concern,” S&P Global executive Jason Gibson wrote on May 19, 2016, to the purchaser, a firm called XIO Group that had been set up in Hong Kong and was planning to do the deal through an offshore private-equity fund. Mr. Gibson emailed that he hadn’t received information he expected about who owned XIO and where it was getting the money for the purchase.

The sale went through. XIO acquired J.D. Power four months later for $1.1 billion. The deal left a U.S. company famed for enhancing transparency—shining a light on the automotive and other industries—owned by a private company that was soon embroiled in a largely hidden dispute in China over its funding.

Most XIO employees knew little about where its funding came from. Some advisers to XIO received differing accounts.

The J.D. Power deal was completed amid a wave of overseas acquisitions by cash-rich, privately owned Chinese companies. Some of them have unclear ownership structures that bankers and lawyers say can be a source of confusion. XIO provided full details of its investors to everyone involved in the U.S. regulatory approval process for J.D. Power, a spokesman for XIO said.

Purchases of foreign assets by Chinese companies exploded in 2016 to a record $217 billion. Though China’s government has sought to rein these in, the buying continues, at a slower pace.

XIO was among the new buyers Western bankers and lawyers started hearing about. A year after it was founded in Hong Kong, XIO opened its headquarters office in London’s Shard skyscraper in 2015. A Shanghai-based fund company called Shanghai Li Hong Investment Center invested hundreds of millions of dollars from mainland China in one of XIO’s acquisitions, according to a public document at China’s Ministry of Commerce. XIO controls Shanghai Li Hong, the XIO spokesman said.

XIO quickly developed the capacity to do billion-dollar deals. Yet its executives and a billionaire Chinese tycoon are fighting over its assets in lawsuits in two jurisdictions, with details hidden from public view.

“Beneficial ownership of companies is difficult to understand in China,” said Bruno Raschle, vice chairman of Zurich-based private-equity firm Schroder Adveq. “You never know who is really behind a company—an individual or the government—or sometimes the government using individuals or making use of individuals.”

Chinese acquirers around which ownership questions have swirled include the conglomerate HNA Group Co. The Swiss Takeover Board found in November that when HNA bought a Swiss airline-catering firm called Gategroup in 2016, HNA failed to disclose that two of its owners held their stakes on behalf of HNA’s co-founders. HNA said it respected the Swiss board’s authority.

“Many companies in China mistakenly believe that extreme secrecy is a form of discretion,” said Abel Halpern, a former partner of U.S. private-equity firm TPG who is setting up a business to advise Chinese companies investing outside China.

“Such activity can put a black mark on Chinese capital as an asset class,” Mr. Halpern said. “If people believe Chinese capital is tainted by deliberately opaque structures, then such capital is viewed with suspicion and mistrust.”

In China, tracing ownership of companies can be complicated by a practice called guanxi, the cultivation of relationships and unwritten favors. This can come into play when wealthy Chinese purchase international assets as a way to move money overseas without their government’s knowledge, said lawyers and bankers familiar with the practice.

Because of the risk that acquisitive companies with unclear ownership could be conduits for money laundering and tax evasion, the U.K. in 2016 published an open register of companies’ beneficial ownership. European Union countries agreed in December to create public registries listing such information. Three bills in the U.S. Congress would require companies to disclose their beneficial owners.

Nine of 10 senior executives said it was important to know the ultimate owner of companies they do business with, in a 2016 survey of 2,800 executives in 62 countries by EY (formerly Ernst & Young).

“If legitimate companies like J.D. Power are being bought up or interacting with anonymous companies, it opens the door to increased liabilities about which we have no idea,” said Gary Kalman, executive director of the Financial Accountability & Corporate Transparency Coalition, a Washington-based nonprofit that campaigns against corruption.

Goldman Sachs Group Inc. won’t advise XIO because of concerns about how it is funding deals, according to a person familiar with Goldman’s decision-making.

The spokesman for XIO said it works with “the most reputable global investment banks” and hasn’t asked Goldman to advise on an acquisition.

It is common practice for private-equity firms not to publicly disclose their investors, the spokesman said. “Honoring nondisclosure agreements and client confidentiality is a basic tenet in following international standards accepted by leading global alternative investment firms,” he said.

Addressing criticisms made of anonymous companies, the XIO spokesman added: “Private equity funds have made an incontestable contribution to the global economy.”

When XIO sought to buy J.D. Power in early 2016, it had competition from better-known companies. XIO faced pressure to convince owner S&P Global that XIO was a credible bidder for the auto-research company, according to people involved in the acquisition process.

XIO Chairwoman Athene Li and Chief Executive Joseph Pacini enlisted Thomas Borer, a well-connected former Swiss diplomat. To vouch for XIO to S&P Global, Mr. Borer introduced XIO to John Negroponte, who had worked for S&P Global when it was called McGraw-Hill and later was U.S. director of national intelligence under President George W. Bush. Mr. Borer, Mr. Negroponte and S&P Global declined to comment.

In April 2016 S&P Global announced it had agreed to sell J.D. Power to XIO, “a global alternative investments firm.”

XIO would make the purchase using a fund based in the Cayman Islands, which doesn’t require firms to publicly disclose their investors. It was during the following month that S&P Global’s Mr. Gibson asked XIO for its ownership and funding details as the seller prepared to seek U.S. government approval for the deal, according to emails reviewed by The Wall Street Journal.

An XIO executive responded that Mr. Gibson should have received the information from XIO’s legal adviser, Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Gibson wrote back that he had received an email from Skadden, but “the part they did not share are the missing financials and ownership pieces.”

“We will not hold up the filing on this matter, but as it’s a joint filing we would expect to be able to review,” he wrote.

That email was forwarded within XIO to its general counsel. She emailed colleagues she was “not sure why MG has not shared these with the team but will chase up now.” MG is Michael Gisser, then head of Skadden’s Asian operations and an adviser to the XIO founders. Mr. Gisser said he is retired from Skadden and declined to comment, as did Skadden.

XIO wouldn’t comment on the correspondence. “In the context of the acquisition of J.D. Power, all of the parties (including law firms, advisers and government agencies) who were part of the U.S. regulatory approval process were provided full details of XIO Group’s diversified institutional investor base,” the XIO spokesman said.

A spokesman for S&P Global wouldn’t discuss Mr. Gibson’s email. S&P Global is “comfortable that the level of due diligence that we performed in connection with our sale of J.D. Power to XIO Group was appropriate,” said spokesman David Guarino.

In June 2016, as XIO was working on getting U.S. government approval for the deal, its general counsel resigned. She left in part because she didn’t believe she had sufficient information about XIO’s investors to do her job properly, according to former employees, some of whom were employed at XIO at the time.

XIO’s spokesman said the general counsel left to pursue a master’s degree in business administration and continued to support XIO. The former counsel now works at a U.S. private equity firm.

An XIO executive working on the J.D. Power deal departed not long after. The two were among at least 14 investment professionals who have left XIO since the firm started in 2014, according to the professionals and to websites including LinkedIn.

The spokesman for XIO called its staff turnover “lower than average.”

Within XIO, only its four founding partners know who the investors are, and no other current or former employees have any knowledge about them, the spokesman said. He said XIO is “legally bound by Cayman confidentiality law” not to disclose its investors without their permission. He added this is normal for private-equity funds based on the Caribbean island, where “many private equity vehicles are domiciled.”

Nine of the former XIO employees who left said they were skeptical that XIO had a fund containing money from many separate institutions, which is what they said they were led to believe when they joined. The former employees, at least three of whom worked on the J.D. Power deal, said XIO was more secretive about its investors than other firms where they have worked.

XIO staff appeared on one occasion to give differing accounts of who funds its deals. When a Moody’s Investors Service credit officer met with XIO staff after the deal announcement to discuss debt ratings for J.D. Power, he was told XIO’s investors were Chinese, according to the Moody’s officer, Edmond DeForest.

A Deloitte accountant got a different response weeks later when he referred to XIO’s “China resident investors” in an email to XIO that was reviewed by the Journal. “There may be a misconception. The investors into the XIO fund are not primarily Chinese,” XIO partner Carsten Geyer replied.

The Deloitte accountant, Anthony Passalaqua, declined to comment.

As the summer of 2016 progressed, XIO contacted financial firms to ask if they would also invest in J.D. Power. On Aug. 8, XIO’s Mr. Pacini emailed British pension fund Hermes Investment Management about a “co-Investment opportunity with J.D. Power,” saying investors could make as much as 2.9 times their money through a resale within three years. Hermes was interested but decided not to invest, in part because it couldn’t get comfortable with the lack of information it received about XIO, a person familiar with the talks said.

BlackRock Inc., the world’s largest asset manager and a former employer of XIO CEO Mr. Pacini, did invest with XIO, people familiar with the acquisition said. So did Beijing-based China Life Insurance Group, according to an investment manager at the insurer.

The deal for J.D. Power gained approval by the Committee on Foreign Investment in the United States. XIO said the agency’s review finished in 30 days. The committee declined to comment.

XIO completed the acquisition on Sept. 7, 2016, but mystery over its funding didn’t end.

A New York investment banker who had advised XIO on the acquisition met later that year with a Chinese businesswoman named Carol Xie, who shocked the banker by saying her father’s investment group had bought J.D. Power—a notion the banker hadn’t heard before—according to a person familiar with the meeting. Her father is Xie Zhikun, a prominent Beijing tycoon.

Within months, Mr. Xie was in full warfare with XIO. As the Journal reported in March 2017, Mr. Xie insisted he had given the firm almost $1 billion to do deals. XIO said he had not, and demanded he stop telling people he was affiliated with the firm.

In a message reviewed by the Journal, XIO’s Ms. Li wrote to her lawyers saying Mr. Xie had repeatedly tried “illegally” to sell a company XIO owned. The company was Lumenis Ltd., a medical-equipment maker XIO bought in 2015. Mr. Xie has asserted that his money funded the acquisition.

A representative of Mr. Xie wrote to XIO on Dec. 30, 2016, demanding an explanation of how XIO’s investments were performing and how the J.D. Power deal was funded. “We have never received the level of information which we should have,” said the letter, which the Journal reviewed. “This is a very unsatisfactory situation and not one that we can allow to continue.”

In February 2017, Mr. Xie sued in a Cayman Islands court, accusing XIO’s Ms. Li and Mr. Pacini of agreeing to take his money and then receiving “secret profits” in an alleged fraud. He also sued Ms. Li in Hong Kong.

A spokesman for Mr. Xie declined to comment, as did a lawyer for Ms. Xie.

At a meeting in 2017, which was not attended by Mr. Xie, Ms. Li likened Mr. Xie’s contention that he had entrusted money to XIO to a man unexpectedly claiming paternity of a child, said a person who was present.

XIO has said it raised a $3.2 billion investment fund in 2014 with a diversified group of investors it didn’t name that included fund managers and insurance companies, including some from Asia. XIO says Mr. Xie isn’t one of its investors and never was.

After buying J.D. Power, XIO hired new executives for the California-based company and expanded its operations with the purchase of National Appraisal Guides Inc., a U.S. publisher of vehicle pricing data. XIO is “tremendously proud of the success of J.D. Power and its premier position of ‘voice of the consumer,’ ” the XIO spokesman said.

In July, XIO had J.D. Power borrow $180 million more, in part to fund the acquisition. This made J.D. Power’s debt “very high,” Moody’s said. In July it downgraded J.D. Power’s credit deeper into non-investment-grade territory, to B3 from B2.

Another purpose of the borrowing was to enable J.D. Power to pay dividends of about $100 million, according to Moody’s. XIO declined to name the investors who would receive these dividends.