2Q analyisis: The bulls hesitate

1) Fundraising: RMB rebound approaching?

Four weeks ago, everyone was expecting a rebound in renminbi-denominated fundraising. China's stock markets were at record highs and there was unbounded enthusiasm for the possibilities of going public domestically. Local currency funds would be required to support companies operating in industries in which direct foreign participation is not permitted.

The Shanghai Composite Index (SCI) was at its highest level since 2008 and the Shenzhen bourses - the main board, SME Board and Chinext - were trading at levels never seen before. And for those seeking liquidity for early-stage companies, but without the long waiting times and strict regulatory requirements of the other boards, the National Equities Exchange and Quotation (NEEQ), or the New Third Board, had become an increasingly attractive option.

Then came the fall. The SCI gained 5.76% on July 9 to close at 3,709 points, but since the middle of June the index has fallen approximately 25%. The Shenzhen Composite Index has posted a one-month loss of 34.71%, while SME and Chinext boards have seen similar levels of price erosion. Suddenly the multiples arbitrage case for de-listing a company in the US or reorienting a private company from an offshore to an onshore IPO was no longer quite so compelling.

In the midst of all this, second quarter fundraising statistics from AVCJ Research show that renminbi-denominated vehicles received less capital than for any quarter in the last 18 months. Commitments came to $2.2 billion, down from $6.6 billion for January-March, and the number of funds winning commitments fell by half. Meanwhile, nine US dollar funds reached final or incremental closes worth a combined $2.7 billion, compared to three funds and $1.2 billion in the previous quarter.

How much should we read into this? Not much, in all likelihood. Renewed appetite for renminbi funds based on opportunities in the technology space is still quite short-lived and fundraising efforts may have yet to reach a conclusion: Notably, partnerships between Sequoia Capital and Huatai Securities and China Renaissance and CITIC Securities have yet to result in any final close announcements.

And the capital will probably be raised. Despite the recent sell-off, each of China's main indexes is still up substantially on a one-year basis, and take-private offers for US-listed Chinese companies continue unabated.

Despite the recent sell-off, each of China's main indexes is still up substantially on a one-year basis, and take-private offers for US-listed Chinese companies continue unabated

Furthermore, although enabling certain technology companies to go public domestically would require regulatory change - such as removing the requirement that applicants have been profitable for the last two years - numerous industry participants have bought into the idea that this will happen. Purported initiatives include setting up a new board on which companies already listed overseas can offer shares to domestic investors.

Where foreign ownership restrictions prevent offshore venture capital funds from having direct exposure to certain industries - the variable interested entity (VIE) structure that works around this obstacle for US listings does not apply domestically - renminbi funds may be well positioned to capitalize. And most VC-focused renminbi vehicles are currently a fraction of the size of their US dollar counterparts.

At the same time, it is worth noting that there is still a place for US dollar funds in the technology space. There remains uncertainty about participation in certain industries, but the decision last month to allow foreign investors to fully own and operate e-commerce companies in China suggests that, in this area at least, altering investment structures to accommodate an onshore listing will not be necessary.

In addition, for companies that have reached a certain size on the back of offshore funding there may be no incentive to change course. Large, late-stage rounds for technology companies have become an industry standard over the last 18 months. In the second quarter, GGV Capital, Qiming Venture Partners and Banyan Capital raised a top-up fund, an annex fund and a co-investment fund, respectively, all of which allow continued participation in portfolio companies that have gained traction.

Missing the second quarter cut-off by a matter of days, Shunwei Capital Partners closed its third US dollar fund at $1 billion - nearly twice the size of its predecessor and comfortably the largest pure China VC fund in operation.

2) Investment: Bouncing back

Asia private equity investment got off to a typically slow start in 2015, with first-quarter figures - as they then stood - indicating the weakest three-month period in nearly two years. The region has since more than made up for its hesitancy. Between March and June, investment reached $34.2 billion, the highest quarterly level on record, surpassing the $31.9 billion posted for October-December 2007.

The number of transactions was actually down slightly on the previous three-month period, but the check sizes were bigger; and written by an array of investors that stretches well beyond traditional private equity, with sovereign wealth funds, pension plans and hedge funds all in the mix.

This is characteristic of the activity in China: the amount of capital deployed nearly tripling on a quarter-on-quarter basis to surpass $18.6 billion, but transaction volume for both periods was in the region of 200.

Inevitably, technology continues to attract huge interest. Alongside a $850 million round for entertainment listings and discount deals service Dianping and a Silver Lake-led $500 million investment in US-listed travel site Qunar, there were two sizeable deals, both within the Alibaba Group ecosystem, that unify financial services and information technology.

Ant Financial Services, an affiliate of Alibaba Group built around the company's Alipay network, received $1.4 billion from a group of investors including the National Council for Social Security Fund, China Development Bank Capital, Primavera Capital and GP Capital.

Ant Financial is also the largest shareholder in Zhong An Online Property Insurance, which raised $931 million from CDH Investments' wealth management platform, China International Capital Corp, SAIF Partners, Keywise Capital Management, and a Morgan Stanley-controlled vehicle.

Zhong An, whose other backers include Tencent Holdings and Ping An Insurance, is said to be the first insurance company in China to sell policies and handle claims online. It has ambitions to extend its relatively nascent business into areas such as life insurance and asset management. The company is emblematic of the kind of disruption Ali Financial wants to bring to the traditional bank-led system, and investors are clearly willing to pay a premium for exposure.

Other significant contributions to the second quarter investment total came from South Korea and India. Deals in the former jurisdiction included a bail-out for Posco Engineering and Construction but also two transactions that reflect its e-commerce potential: A KKR and Anchor Equity Partners-led group paid $360 million for a controlling stake in Ticket Monster, while SoftBank Corp. injected $1 billion into rival player Coupang.

The company is emblematic of the kind of disruption Ali Financial wants to bring to the traditional bank-led system, and investors are clearly willing to pay a premium for exposure

India, meanwhile, posted its sixth consecutive quarterly increase in private equity investment, confirming the industry's recent revival. A total of $3.8 billion was committed - up from $2.7 billion in the previous three-month period. Notable deals include The Carlyle Group investing $500 million in South Asia-focused start-up Magma Energy, car-booking platform Ola getting $400 million from new and existing investors; and Apax Partners paying $384 million for a stake in Shriram City Union Finance.

3) Exits: Riding the bull run

With public markets across the region at record highs - or close to them - private equity investors set about unwinding their positions in the second quarter of 2015. Overall exits for the period came to $12.2 billion, short of the quarterly average for 2014 but a marked improvement on the relatively disappointing first three months of this year.

Public market exits accounted for just over half of total transaction value, a level not seen in nearly four years. Of the 20 largest exits during the quarter, 10 were open market sales, including four of the top six. This compares to five open market sales in the top 20 for the first quarter of 2015.

Hony Capital completed two exits, selling $1.3 billion worth of shares in CSPC Pharmaceutical Group - a state-owned enterprise it helped restructure over a number of years - and a $169 million stake in Chinasoft International. The Carlyle Group and Warburg Pincus also completed sizeable open market sales, each realizing around $400 million from Haier Electronics Group and China Auto Rental.

In Japan, Cerberus Capital disposed of its interest in Seibu Holdings for $857 million following a protracted dispute with the board, while Bain Capital and Japan Industrial Partners generated $615 million through the sale of much of their remaining holdings in restaurant chain Skylark.

KKR's India team weighed in with a $413 million exit from Bharti Infratel via the public markets, although three of that jurisdiction's six entrees in the top 25 exits were trade sales. This comes after India was responsible for seven of the 25 largest exits in the first three months of 2015. Over the two years prior to that, the quarterly average was below three.

After a weak first three months, private equity-backed IPOs rebounded to $19 billion, the strongest quarterly performance in four years - if the third quarter of 2014, which included the Alibaba Group offering - is excluded. Hong Kong was the driving force, delivering seven of the 10 biggest offerings during the period. In the first three months of the year this market was responsible for only one of the top 10.

 

 

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Exits
• Fundraising
• Investments
• Buyouts
• South Asia
• North Asia
• Japan
• China
• India
• Hony Capital
• Cerberus Capital Management
• Fundraising
• buyout
• KKR
• Exit