Investors Ignore Risks in Pursuit of Growth in China


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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.


SHANGHAI — When the Chinese social networking site Renren goes public in the United States this week, investors will most likely ignore the big risks the company faces and be lured by a combination of the words “China” and “social networking.”

Shares for popular Chinese technology companies like Baidu, the Internet search engine, and Youku, the online video site, have risen triple-digit percentages since their initial public offerings, whetting investors’ appetites for such offerings.

In perhaps the most extreme example of how in fashion the sector is, Facebook, the biggest social network company in the world, has a market value of about $70 billion, based on a share sale currently being contemplated, making it worth more than companies like Boeing.

The demand for Renren shares was clear Friday when the company raised the expected price range of its I.P.O. 30 percent to $12 to $14 per share.

“Appetite to invest in China right now is so strong that some investors are willing to ignore factors that they wouldn’t in other markets,” said Mark Natkin, managing director of Marbridge Consulting, a company based in Beijing that advises investors on the Internet and telecommunications sectors in China.

Renren’s I.P.O. filings do raise a handful of very serious questions.

For one thing, Renren does not really seem sure how many users it has. According to its April 27 revised I.P.O. filing, Renren’s monthly unique log-ins grew by only five million, or 19 percent, in the first quarter of 2011 — not the seven million, or 29 percent, it had reported in its first filing only 12 days earlier.

Some investors and analysts brush off such red flags — after all, China is the biggest Internet market in the world and it is growing rapidly. They justify their cavalier attitude by saying that figures reported by Chinese companies should be used for directional information and not as perfect quantitative measurements.

Others say the opaque information is a big problem.

“If you can’t validate the numbers or the company proves it doesn’t have a good handle on the numbers, then you’ve got to be concerned,” said Gary Rieschel, founder of Qiming Venture Partners, which is an investor in Kaixin001, a Renren rival.

Another possible risk for investors is the broad government oversight that Renren and other companies operating in China face.

The Chinese authorities keep extremely close tabs on Internet companies, arguing that is necessary to maintain social harmony. The monitoring led to a falling out between Google and the Chinese government last year that ended with Google’s curtailing its operations in the country.

Renren says in the risk factors section of its I.P.O. prospectus that this oversight means a prohibition against posting content that, among other things, “impairs the national dignity of China” or is “superstitious.”

The prospectus does not mention the recent uprisings in the Arab world, which led to a crackdown on the use of certain words on the Internet in China, but it does say that Renren may not post content that is considered “socially destabilizing.”

If Renren fails to comply, the company says, its Web sites could be shut down. Clearly that could put it out of business.

Whether a posting on a social network page is objectionable is determined by the Chinese authorities. Renren is also required to monitor advertisements on its Web sites, some of which are subject to special government review before they are posted.

Renren must even guard against providing services that may lead to its users’ finding themselves in “emotionally charged situations.”

Still, it is not difficult to find people who will give the company the benefit of the doubt.

“Given the investors it has who have board seats and who work closely with it, you would expect any major issues to have turned up by now,” said Nick Einhorn, an analyst at Renaissance Capital, an I.P.O. research and investment firm based in Connecticut.

Renren’s investors include General Atlantic, the private equity firm, and DCM, the venture capital firm.

Clare Baldwin reported from New York.

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