US private equity firm Warburg Pincus plans to lift its stake in a Chinese car rental company whose chairman founded the Luckin Coffee chain now at the centre of an accounting scandal.
The firm is spending about $145m to increase its share in Hong Kong-listed China Auto Rental from 11 per cent to more than 17 per cent, in two separate transactions, according to stock exchange filings and several people familiar with the matter. CAR owns a stake in UCAR, a chauffeur car service.
Warburg first invested in CAR, which is chaired by Luckin founder Lu Zhengyao, almost a decade ago and has held a small stake ever since. CAR’s share price has been hammered by the fallout from the Luckin scandal as investors deserted businesses linked to Mr Lu.
“Warburg had confidence in buying more shares when the price is so low,” said an executive who used to work in Warburg’s Chinese business.
The planned investment comes despite the Chinese economy facing its worst downturn in years. Gross domestic product contracted in the first quarter for the first time since the 1970s, as efforts to contain the coronavirus pandemic brought the economy to a standstill.
Although other firms were examining buying shares in CAR, Warburg, which counts former US Treasury secretary Timothy Geithner as its president, has moved faster.
“They needed to safeguard their existing investment,” said another former Warburg executive, pointing to the risk that Mr Lu’s creditors may seek to seize shares in CAR and then dump them.
Luckin, which listed to great fanfare on Wall Street last year, has appointed an independent committee to investigate alleged fabricated transactions. Chinese regulators are also investigating on behalf of the US Securities and Exchange Commission.
In 2019, CAR’s net profit tumbled almost 90 per cent to Rmb31m, while net debt reached almost Rmb9bn. The company put the drop in earnings down to a number of factors, including lower demand in the country’s big tourist cities.
However, the group remains one of the biggest car rental companies in a country where the auto market has been steadily growing.
The team at Warburg responsible for the original investment in CAR and UCAR was led by David Li, who left Warburg in 2016 to form his own fund, Centurium Capital. At Centurium, Mr Li led fundraisings for Luckin and is a board member. He has denied any knowledge of the alleged fraudulent accounting at Luckin.
Warburg declined to comment. CAR also declined to comment.