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Wednesday, December 19, 2012

FMCN, China, Taiwan, Private Equity and a Lawyer

The expat finance community in Taiwan is very small. Yet, I was lucky to befriend one of them and get to know these guys a bit better. One of them, is a partner for a large global law firm and told me PE firms do some business in Taiwan but not much because it's hardly ever a big success, but they don't expect a large amount of fraud here. Yet, in China they'll do deals expecting some fraud but hoping the growth and their expertise will allow it to be a success.

Maybe, it's too anecdotal, but it fits the description for lots of deals in China. Yes, the accounting is bad and it's probably no where as good as the audited financial statements suggests but at least we can get a deal done and it might still work out. It's important for short sellers to understand that, unless the company is a blatant fraud-- there a good chance the company will be bought out.

Shorting, China -- position size

**Large pile -- blatant frauds that need a good research report to reveal

Medium pile -- horrible accounting, but in a business that's not famous or well known enough to be bought out. Fairly well known financial firms could fit here as well, sine PE firms will probably stay away from financial firms since assets are harder to verify, and trust could be broken with a short report.

Small pile -- accounting issues, ranging from medium to small. Large, well known firm that could be bought out.

 **Even with a great short, I'd suggest keeping the size small (depending on who your clients are, and your ability to withstand volatility -- for me, it's 3-2%) Never underestimate the ability for PE firms in China to do horrible deals that would make Thornton O'Glove faint.