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Alibaba IPO may benefit scions of Chinese leaders

It was billed as the biggest private financing deal in the history of China.

In September 2012, the Alibaba Group announced that it had completed a $7.6 billion deal to buy back half of Yahoo's stake in it. (Disclosure: CNBC has a content-sharing partnership with Yahoo's finance site.) The giant e-commerce company raised part of the money by selling shares to select investors, notably China's sovereign wealth fund and three prominent Chinese investment firms.

Alibaba founder Jack Ma.
Peter Parks | AFP | Getty Images
Alibaba founder Jack Ma.

What Alibaba did not detail was the deep political connections of the investment firms, Boyu Capital, Citic Capital Holdings and CDB Capital, the China Development Bank's private investment arm.

Their senior executive ranks included sons or grandsons of the most powerful members of the ruling Communist Party, according to an analysis by The New York Times. Documents reviewed by The Times also show that a fourth investor bought Alibaba shares that month: New Horizon Capital, a private equity firm co-founded by the son of China's prime minister at the time, Wen Jiabao. The new revelations only demonstrate the paucity of information about existing shareholders in what is poised to be the biggest initial public offering of this year.

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As part of its regular filings for the offering, Alibaba disclosed the owners of about 70 percent of its shares. The group includes big foreign investors like Yahoo and the Japanese communications company SoftBank, as well as top executives such as Alibaba's chairman, Jack Ma, and its vice chairman, Joe Tsai.

But less is known about other shareholders, whose sway may be significant even if their stakes are not. The situation raises questions about the transparency and operations of Alibaba, which is set to go public in the United States in the coming months.

"It would take, at this point, a seismic effort to topple an Alibaba," said Anne Stevenson-Yang, a co-founder of the Beijing firm J Capital Research, which specializes in detailed analyses of Chinese companies. "They've got so many different allies across so many different ministries."

Such politically connected investors will most likely reap a bonanza when Alibaba goes public, an offering that analysts estimate could value the company at more than $200 billion. At that level, even a 1 percent stake would be worth $2 billion.

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Already, their investments have performed spectacularly well.

New Horizon Capital reported that at the end of 2013 the value of its Alibaba stake stood at 3.73 times the cost of its initial investment, according to the documents — financial statements from one of New Horizon's investors, the Cayman Islands-registered partnership Legacy Capital.

By that measure, the $400 million investment in Alibaba made by a subsidiary of Boyu Capital gained more than $1 billion in the same time period. Boyu counts former President Jiang Zemin's Harvard-educated grandson Alvin Jiang as a partner.

In a country of more than 1.3 billion people, the fact that four Chinese companies investing in Alibaba have had executives who are either sons or grandsons of the two dozen men who have since 2002 served on the Politburo Standing Committee, the most elite group of leaders, speaks to how deeply China's political class has attached itself to the highest echelons of finance. For example, The Times reported in 2012 that Mr. Wen's relatives, including his son, Winston Wen, who co-founded New Horizon Capital, controlled assets worth at least $2.7 billion.

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Such connections matter. They help secure deals, potentially giving companies an advantage in a highly competitive business environment.

Corporate ties to these so-called princelings have also attracted the attention of law enforcement authorities in the United States. Investigators at the Securities and Exchange Commission and federal prosecutors in Brooklyn are looking at whether a JPMorgan Chase program called Sons and Daughters, under which it hired relatives of senior Chinese officials and top company officials, violated the Foreign Corrupt Practices Act. Other banks are under investigation for similar programs.

JPMorgan and the other banks have not been accused of any wrongdoing. To run afoul of the American law, a company must act with "corrupt" intent or with the expectation of offering a job in exchange for government business.

In Alibaba's case, the ownership stakes are tangled in layers of shell companies that shift from one Caribbean tax haven to another.

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Some of Boyu's shares are held through one of its subsidiaries, Athena China Limited, which is set up in the British Virgin Islands. Athena is controlled by another offshore entity, Prosperous Wintersweet BVI, which in turn is owned by the Cayman Islands-registered Boyu Capital Fund I, Alibaba reported to the Securities and Exchange Commission.

Legacy Capital was set up in 2011. As of the end of last year, its main assets included holdings in Boyu Capital Fund I, New Horizon Capital IV and Athena China, all of which held Alibaba shares.

With such an intricate web, it is hard to get a complete picture of Alibaba's ownership structure.

For example, the Legacy Capital documents disclosed Athena China's $400 million investment in Alibaba shares. But they did not detail the additional Alibaba stakes held by Boyu and New Horizon.

New Horizon was not part of the September 2012 Alibaba financing arrangement and most likely acquired its holding from existing shareholders, according to a person with knowledge of the transaction, who declined to be identified because of the sensitivity of the issue.

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Robert Choi, a director of Legacy Capital in Los Angeles, did not respond to a request for comment. An Alibaba spokeswoman in Hong Kong said the company was in its so-called quiet period before the public offering and was not able to comment.

Adding to the complexity of the structure, most of Alibaba's new investors in 2012, including the sovereign wealth fund Citic Capital and CDB Capital, were also state-owned. In the case of the government-owned China Development Bank, the relationship goes even deeper. The bank lent Alibaba $1 billion to help it buy Yahoo's stake.

For Alibaba, the connections go to the highest levels of government.

In September 2012, He Jinlei — whose father, He Guoqiang, was then the Communist Party's top anticorruption official — was a vice president at CDB Capital, said two people familiar with the company who spoke on the condition of anonymity because of the sensitivity of the issue. At the time, the China Development Bank was headed by Chen Yuan, the son of China's former top economic-planning official, Chen Yun, who was a member of the Politburo Standing Committee from the 1930s into the 1980s.

The younger Mr. Chen stepped down in 2013 as chairman of the bank. The younger Mr. He was still at the firm as of this year, according to accounts of his activities on company websites.

Citic Capital is one of the investment arms of the state-owned conglomerate Citic, which owns stock brokerages, banks, mines, steel mills and oil fields. Another unit of the company, Citic Private Equity Funds Management, was led until mid-2012 by Liu Lefei, whose father, Liu Yunshan, China's top propaganda official, ascended to the Politburo Standing Committee that November. The younger Mr. Liu was named vice chairman of Citic Securities this March. Jeffrey Zeng, a senior managing director at Citic Capital, is the son of the country's former top planning official, Zeng Peiyan, who was a member of the Politburo — the group, normally with about 25 people, from whose ranks the elite Standing Committee is drawn.

Wang Jun, 73, the son of Wang Zhen, a former vice president, was a longtime chairman of Citic. His father was, along with the elder Mr. Chen, one of the "eight immortals," the group of Communist Party elders who guided the nation in the 1980s. The younger Mr. Wang was, until this year, chairman of another company that Citic had invested in, the pharmaceutical-data firm Citic 21CN. In January, Alibaba and an investment fund founded by Mr. Ma, Alibaba's chairman, acquired a majority stake in Citic 21CN.

A representative of Citic Capital said the company did not comment on its investments and that Mr. Liu headed another division of the company. Representatives of CDB Capital and Boyu Capital did not comment.

— By Michael Forsythe, The New York Times