2023 preview: Exits

This year has been difficult for private equity exits in Asia. At the same time, LPs considering fund commitments have become more demanding of GPs in terms of exit track record – to the point that distributions to paid-in (DPI) has displaced IRR as the most important factor in a successful fundraise. In short, LPs want some of their money back before handing out more.

Looking into 2023, investors are in general more optimistic about exits although they expect a shift from IPOs towards M&A and structured transactions involving secondary investors.

“A lot of GPs tell us that COVID has delayed exits by two years, but things are getting back to normal now. If a manager comes to us without exits from the previous fund, we advise them to work on it and come back to us in six months,” said Huai Fong Chew, regional lead for East Asia and the Pacific in the International Finance Corporation’s (IFC) private funds team.

“There is a tendency to hang onto pre-pandemic valuations. Maybe there is enough runway for them to make it work, but many funds are running out of time. They can bite the bullet and sell now at a slightly lower valuation than expected but show some distributions and help raise a next fund, or they can hang on to the asset. It’s not an easy choice.”

IPO angst

US IPOs fell off a cliff this year. There were 143 new offerings on NASDAQ in the first nine months of 2022, compared to 557 a year earlier; IPOs on the New York Stock Exchange are down 93%. Meanwhile, in Hong Kong, PwC expects 80 IPOs in 2022, down 19% year-on-year. Total proceeds are set to fall 68%.

Consequently, investors across multiple jurisdictions in Asia are considering listings closer to home. Jenny Lee, a managing partner at GGV Capital, expects shifts in the most popular IPO venues over the next 3-5 years to be driven not only by what is most suitable for the company but also by geopolitical issues.

"While we would love for all companies to be on the best exchange with the most depth and liquidity for us to exit, we do have to take a step back because valuations have started to factor in geopolitical risks," she said. "Then the alternative exchange would come in, but that doesn't necessarily mean we lose on quality or premium."

There have been 270 IPOs by PE-backed Asian companies in 2022, according to AVCJ Research, down from 380 last year. Proceeds have fallen from USD 89.6bn to USD 53.4bn. Of that, 83% has been raised by Chinese companies listing on mainland exchanges. In 2021, half the Chinese IPO proceeds came from overseas. It reflects reasonably strong A-share performance compared to most global markets.

“Given that the US and Europe are likely to enter a recession cycle, the Hong Kong market may only have a window of a few months, but A-shares should continue to rise, attracting more funds to the north,” said Wayne Shiong, partner at China Growth Capital, an early-stage technology investor.

While the overall number of A-share IPOs – including those by companies without financial sponsors – has fallen about 20% this year, proceeds hit a new high. PwC expects more than CNY 560bn (USD 80.5bn) to be raised this year, up 3%, and then CNY 590bn-CNY 652 bn in 2023.

Even though IPOs might be achievable, investors in many Asian markets will not push portfolio companies too aggressively, conscious that valuations are depressed and that numerous technology unicorns are now trading at steep discounts to their offering prices.

Thomas Chou, co-head of the Asia private equity group and a partner at law firm Morrison & Foerster, observes that many successful companies that would have traditionally pursued an IPO at this stage have been forced to consider traditional auction process-led M&A.

“There is an increasing sentiment in the market that the gruelling price discovery process of 2022 has reached an inflection point, and many on the buy-side are preparing to execute M&A transactions in 2023 with more rational valuations approaching those of pre-COVID days,” said Chou.

Activity may speed up as China loosens its COVID-19 restrictions and investors can travel and conduct on-the-ground due diligence. “In these final days of 2022, we are seeing renewed optimism from our clients who are making plans for M&A transactions in the coming year,” Chou added.

Trade sale revival?

Asia private equity exits for 2022 to date are USD 70.1bn, down from a record USD 171.3bn last year. Notably, trade sales to strategic investors have plummeted from USD 110.2bn to USD 37.4bn. Sales to other financial sponsors have also fallen, but less dramatically. Pricing disparities and travel restrictions are the most frequently cited reasons for the drop-off.

However, 2023 is expected to be a good year for strategic buyers. Down cycles are often opportunities to use M&A as a means to enter new geographies and new markets, picking up customers, employees and assets, according to Matthew Koertge, a managing partner at Telstra Ventures. He observed that it played out this way following the dotcom bust and the global financial crisis.

Alex Emery, Asia chairman at Permira, adds that sales to strategic investors are generally more reliable over time than IPOs or sales to other GPs.

“If an asset has strategic value, then a strategic investor would naturally want to buy it. I think we may see the percentage of deals going to corporates move up as private equity buyers become more careful, given issues around the availability of debt. If there are synergies and longer-term value considerations, strategics feel flush,” he said.

Maureen Ho, a partner at Morrison Forester, adds that 2023 will likely be dominated by smaller or more strategic deals between portfolio companies where there are synergies or complementary products. Transactions may also be predicated on building stronger platforms around core technologies, especially as corporates rationalise non-core businesses and re-focus on their areas of greatest strength.

Ho also flags up foreign strategic investors targeting assets in China as an interesting theme. For example, in the first nine months of 2022, German investment in China grew by 114% year-on-year. Large-cap deals Morrison Foerster advised on included an acquisition by a German automotive company.

Returning to liquidity challenges facing private equity firms, there is the prospect of greater secondary investment activity as GPs look for ways to secure more runway for assets that have yet to find an exit while returning some capital to LPs.

“We are seeing the confluence of GPs struggling to raise money while at the same time coming under pressure from LPs to generate exits in a difficult market environment. These factors don’t often work in tandem, but when they do, they create the right environment for secondary solutions,” said Jason Sambanju, a partner and CEO at secondary specialist Foundation Private Equity.

This view is echoed by Lloyd Bradbury, head of Asia Pacific capital advisory at Greenhill: “We’re at a point in the cycle where, for the right price, everyone is a seller,” he said. “We are not seeing widespread distress, but different pockets of pressure and areas of opportunity.”

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• Topics
• Greater China
• IPO
• Trade sale
• Secondaries
• Asia
• Permira Advisers
• IFC
• Telstra Ventures
• GGV Capital
• Foundation Private Equity
• China Growth Capital