RPT-BREAKINGVIEWS-TPG concocts risky remedy for China medical deal

By Katrina Hamlin

HONG KONG, Aug 15 (Reuters Breakingviews) - TPG TPG.O is making an effort to salvage its nearly decade-old investment in a Chinese medical devices company. The U.S. private equity group is leading a consortium, which includes the Qatar Investment Authority, that is offering to take private Kangji Medical 9997.HK, valuing the firm's equity at $1.4 billion. Even if minority investors accept the modest 22% premium to the undisturbed price on June 30, it's a complicated and messy deal.

The firm led by Jon Winkelried paid $200 million for a 25% stake in the maker of minimally invasive surgical instruments back in 2017, the heyday of global financial sponsors' investments in the People's Republic. Today, Kangji is a profitable business that is steadily growing sales of disposable medical devices, with plans to commercialise more sophisticated products such as a four-armed surgical robot.

Though the buyout offer announced this week implies a 75% increase in the business' equity value, cashing out its current 17.9% stake looks tricky for TPG because Kangji's stock has crashed by more than a third since its 2020 public debut, and liquidity is scarce, too: average daily trading volume over the past two years is equal to just 0.15% of the total issued shares.

TPG will instead more than double its ownership in the business to 40%, and the Qataris will help foot the buyout bill by picking up a 20% stake. Kangji's co-founder Zhong Ming and his wife's interest will fall from 53% to 40% to put them on even footing with TPG, though a convertible bond will allow them to top up their stake in the event of an initial public offering or sale.

The problem with the rejigged ownership structure is that it only notionally gives TPG the balance of power alongside the Qataris, who are among a growing group of Middle Eastern investors helping private equity firms to prop up their Chinese investments. Though Zhong will remain the CEO and his family will take just three of the seven board seats, he will have a long list of veto rights concerning the company's level of indebtedness, acquisitions, other transactions, joint ventures and dividends.

TPG and Kangji's founder may have a warm relationship, but this also amounts to a key man risk. Any disagreement could complicate TPG's efforts to guide the business and remedy its investment.

Follow Katrina Hamlin on Bluesky and LinkedIn

CONTEXT NEWS

A consortium led by U.S. buyout firm TPG and the Qatar Investment Authority has proposed to take Hong Kong-listed Kangji Medical private at a valuation of around $1.4 billion, according to a filing to the Hong Kong stock exchange on August 12. The offer represents a premium of 22% to Kangji's undisturbed price on June 30.

The U.S. private equity firm owns a 17.9% stake in Kangji, while co-founder, CEO and Chair Zhong Ming controls 53% through his and his wife’s interests. After the proposed deal, TPG would own 39.7%, Zhong and his spouse would hold 40%, and Al-Rayyan - an entity indirectly owned by the QIA - would hold 20.4%.

TPG acquired a 25% stake in Kangji in December 2017, according to the prospectus for the company’s 2020 listing.