By Mak Yuen Teen

On August 26, the Housing and Development Board (HDB) announced that the completion of five Build-to-Order (BTO) residential projects will be delayed due to financial difficulties faced by the main contractors – Greatearth Corporation Pte Ltd and Greatearth Construction Pte Ltd. Work on the five sites has been suspended since August 20. According to news reports, this will impact more than 2,900 home buyers. Two other public projects – Mandai Crematorium and Columbarium under the NEA and the Gali Batu bus depot under the LTA – will also be affected.

Not surprisingly, the collapse of these main contractors will also create considerable difficulties for subcontractors. A Straits Times report on August 27 titled “Troubled contractor Greatearth closed BTO sites abruptly last week; several subcontractors owed money” said that several subcontractors face heavy financial losses, as they could not only miss out on monies owed to them but are also locked out of sites, and therefore unable to retrieve valuable building materials.

A Business Times report on August 27 titled “Greatearth collapse: will more construction firms follow as reliefs and government help end” cited lawyers working with construction companies saying that increases in materials cost due to disruption in supply chains, and labour cost increases due to the manpower crunch, as a result of Covid-19, have created significant difficulties for construction companies. One lawyer said that construction companies that have been able to stay afloat during this difficult Covid-19 period have been able to do so because of a combination of strong financial reserves and government support received.

Covid-19 may have been a factor in the collapse of the two companies. But did the fact that they were taken private by a private equity firm in 2015 contribute to their demise?

Greatearth Pte Ltd, which indirectly owns Greatearth Corporation and Greatearth Construction, was previously listed on the Mainboard of the Singapore Exchange as UE E&C Ltd. It was privatised and delisted in March 2015 by private equity firm Southern Capital Group, which states on its website that it specialises in “leverage buyouts of businesses that play to Asia’s strength – a large and fast growing domestic consumer market and its competitive edge as a major manufacturing and services hub”.

UE E&C was privatised at a price of $1.25, a discount of 2.3% from the last transacted price before the announcement and a premium of 2.7% from the volume weighted average price for the one-month period up to and including the last trading day.

UE E&C’s last quarterly results announcement on November 13, 2014 for the third quarter ending September 30, 2014 before its delisting showed a company in reasonably good health. It reported profit after tax of $9.7 million, although down from $11.6 million in the third quarter for the previous year, while its quarterly cash flows from operating activities increased to $5.9 million compared to $4.2 million for the comparative quarter. It had cash and bank balances of $164.2 million, while total non-current liabilities amounted to just $14.3 million and total liabilities amounted to $238.2 million, compared to total assets of $497.8 million. In other words, its ratio of total liabilities to total assets was 0.48 and ratio of non-current liabilities to total assets was just 0.03.

Of course, much may have changed between 2014 and now, and Covid-19 would have created stress on the financials of all companies in the sector. However, as was pointed out, a combination of strong financial reserves and government support would have helped companies to stay afloat.

I obtained the business profiles of the various Greatearth companies to determine if Southern Capital still owns the two companies which collapsed. It turns out that it does – through several layers of private companies as shown in the figure below.

I did not obtain the financial statements as it would have cost $50 for each company, there are numerous companies in the group, and all the companies only had financial statements for up to the year ended 31 December 2019 (ACRA, if you are reading this, please consider treating such information as more of a “public good”).

The two Greatearth companies that collapsed are wholly-owned subsidiaries of Greatearth Holding Pte Ltd, which is in turn a wholly-owned subsidiary of Greatearth Pte Ltd. Greatearth Pte Ltd is the new name of UE E&C Ltd after the latter was delisted. Greatearth Pte Ltd is in turn a wholly-owned subsidiary of Universal EC Investments Pte Ltd. Universal is 91.09% owned by a Cayman Islands-incorporated company called Union EC Investments (Cayman) Limited, with the remaining 8.91% owned by 15 individuals, 10 Singaporeans and 5 Malaysians. All the companies in the Figure are audited by Ernst & Young LLP, except for Union EC Investments (Cayman) for which information on the auditor was not available to me.

According to the circular for the privatisation of UE E&C, the offer from Southern Capital was made through Universal EC Investments, which at that time had an issued and paid-up capital of $1, consisting of one ordinary share held by Union EC Investments (Cayman) Limited, which is an indirect wholly-owned subsidiary of Southern Capital Master Fund Limited.

Interestingly, someone sent me information which shows from Google cache (a snapshot of the page by Google) that Greatearth was listed as a portfolio company by Southern Capital on its website on August 24, 2021. However, Greatearth has been removed in the latest version of the list of investments on Southern Capital’s website. The website’s metadata shows that the page was last modified on August 27, the day after news broke about Greatearth’s financial difficulties.

So did private equity contribute to the demise of the two Greatearth companies by causing them to take on too much debt after the privatisation of UE E&C? Was too much cash taken out of these companies leaving them with insufficient financial reserves? While there are business reasons for the corporate structure that we see in the Figure (and this may not be a complete representation of the overall corporate structure), such a structure also poses risks associated with governance of company groups. For instance, in such a structure, cash transfers among group companies may weaken certain companies within the group.

I do not have enough information to answer the above questions definitively. However, I think HDB and other relevant authorities may want to look more closely into what really caused the collapse of the two Greatearth companies and whether there are lessons they can draw when awarding contracts in future and monitoring the performance of contractors.

It may not be Covid-19 that took down Greatearth.