4Q analysis: IPO awakening

1) IPOs bounce back, gradually

Orica Capital, Shanghai Lehel Capital and Shenzhen Oriental Fortune Capital look set to be among the first private equity firms to achieve a liquidity event in China's capital markets as the year-long embargo on new listings came to an end. These three players are backers of Zhejiang Wolwo Pharma, which was one of five companies that received the green light to go public at the end of December.

Valve manufacturer Neway, a portfolio company of Suzhou International Development Venture Capital was also in this first group.

There have since been more approvals and the China Securities Regulatory Commissions said it expects around 50 new listings in the opening batch. For domestic private equity firms that brought LPs into their funds with promises of swift rewards at lofty multiples via the IPO markets, this is welcome news - although it may do little buff what has become a tarnished investment thesis.

First, the listing queue is long - the CSRC has never approved more than 150 private equity-backed offerings in a single year - and the backlog will take years to clear. Second, exit multiples remain well below their previous highs.

The CSRC has also offered a glimpse of how it would like China's capital markets to evolve, announcing plans to switch from an approval-based system for IPOs to a registration-based system. More responsibility will be placed on the shoulders of sponsors, bankers and auditors to ensure frauds don't make it to the bourse, with penalties imposed on those that don't conduct thorough due diligence.

It is to be hoped this will make the timing of the IPO process more transparent for private equity investors, but such changes cannot be swiftly implemented.

While private equity-backed IPOs on China's domestic bourses remained resolutely zero in the final quarter of 2013, there was an encouraging uptick in activity elsewhere. Portfolio companies going public collectively raised $8.7 billion, more than double the amount for the previous three months and the highest quarterly total of the year. The number of offerings also rose from 21 to 59.

Of the 20 largest offerings, 14 were Chinese companies and 12 went public in Hong Kong. Travel website Qunar and classifieds provider 58.com listed on US bourses - as did VC-backed 500.com, Sungy Mobile and Autohome - confirming that American investors are interested in the right kind of Chinese company. Each one is trading comfortably above its IPO price.

Notable appearances are also made by companies from Australia. Four PE-backed offerings together raised $1.5 billion in 2013, the most in four years and the third-highest total on record. Three of these - accounting for 80% of the proceeds - took place in the final quarter.

Foreign exchange services provider OzForex, electronics retailer Dick Smith Holdings and insurer Cover-More Group delivered full or partial exits to their respective PE investors and they are currently trading above their IPO prices. However, stock performance has been patchy amid concerns about oversupply and fiscal tapering in the US. Several offerings, reportedly including KKR-owned Bis Industries, have been postponed due to weak demand.

Still, it hasn't reined in expectations that the tailwinds responsible for making Australia the region's third most-active market in 2013 will continue into this year. Healthscope Group, which is owned by The Carlyle Group and TPG Capital, and Pacific Equity Partners-owned Spotless Group are among those expected to seek listings.

2) Pan-regional fundraising gains, China weakens

The fundraising figure for the final quarter of 2013 looks bleak - at $7.6 billion, it is not quite as bad as the second quarter, but still contributes to the smallest full-year total since 2009. Just over 40 vehicles reached a close of some kind, down from 80 in the previous quarter, and only 32 of these were final closes.

China-focused funds fared particularly poorly, with just 20 funds attracting commitments of $1.9 billion between them. One was to go back to the second quarter of 2009 for a lower figure.

The difference between the two periods is the presence of renminbi-denominated funds. In 2009, US dollar vehicles accounted for the bulk of capital raised; in the fourth quarter of last year, they contributed zero. The $1.9 billion raised came entirely from 20 renminbi funds recorded as reaching a final or incremental close, and more than 40% of that was the state-backed Sailing Capital Buyout Fund.

It is important to note that, as always, these data are provisional and further fundraising activity may still come to light.

From an Asia-wide perspective, the significant "missing entry" from the fourth quarter ledger is Affinity Equity Partners' fourth regional buyout fund, which had a target of $3.5 billion. By most accounts fundraising activity finished well before the end of 2013 and lawyers were concluding the paperwork in December, but there has been no official announcement.

Affinity's final close would add another $1 billion to an Asia total that featured more good news for pan-regional buyout funds. CVC Capital Partners reached a first close of $2 billion on its fourth Asia vehicle and the $3.5 billion target looks well within reach. Navis Capital Partners, meanwhile, arrived at a first close of $860 million for Fund VII in less than three months and is expected to raise up to $1.5 billion by the end of January.

With uncertainty in numerous markets - whether its growth prospects in China and India or the impact of the US unwinding its fiscal stimulus on Southeast Asia - it may be the pan-regionals' mantra is becoming more convincing: it pays to have the flexibility to invest across multiple jurisdictions rather than be wedded to the fortunes of just one. Brand name and longevity are of course also key factors.

Beyond the pan-regional players, South Korea and Japan fundraising retained its recent momentum, between then accounting for nine of the 25 largest fundraises in the fourth quarter. H&Q and Anchor Equity led the way for Korea, reaching final closes of $532 million and $500 million, respectively. Japan's offering is broader and smaller cap, ranging from JAIC secondariesspin-out WM Partners to IT-focused Global Brain Corporation.

For 2013 as a whole, Hong Kong - home to most of the pan-regional GPs - and Japan were the only two significant markets in Asia to see a year-on-year increase in capital raised.

3) Relative resurgence for growth deals

The balance of power between growth and buyout investment in Asia swings back and forth in response to the public markets. For the past two years buyouts have accounted for the largest share of deals by value and until the final three months of 2013 this share appeared to be gradually increasing.

In the first quarter of 2012, $15.1 billion was invested in Asia, 34% in buyouts and 31% in growth and pre-IPO transactions. Twelve months later, total capital committed was down slightly, coming in at $12.7 billion for the quarter, but the buyout share had shot up to 42%, compared to 22% for growth and pre-IPO deals.

Between July and September of 2013, buyouts accounted for 54% of the $13.5 billion invested by PE firms in the region, while the growth and pre-IPO segment was stuck on 32%.

Large transactions move the needle in percentage terms and the third quarter did include two of the largest buyouts of the year - KKR's acquisition of Panasonic Healthcare and MBK Partners' purchase of ING Life Insurance Korea. The only $1 billion-plus buyout in the final three months of 2013 was Baring Private Equity Asia's announced take-private bid for US-listed Giant Interactive.

However, the jump in growth and pre-IPO deals is also significant. A total of $5.6 billion was deployed, the largest quarterly figure of the year - if Guolian Industrial Investment Fund Management's $3.9 billion injection into PetroChina Tubes Union in June is discounted from consideration as an extreme outlier.

China alone accounted for $3.1 billion of the quarterly total, reentering territory not visited since the middle of 2012. It is tempting to see this in the context of growing optimism about the IPO markets, domestically and overseas.

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• Topics
• Fundraising
• Exits
• Buyouts
• Expansion
• Asia
• Fundraising
• Exit
• IPO
• China
• Australia
• buyout
• Growth capital
• South Korea