3Q analysis: The IPO genie

1) Exits: Alibaba makes PE wishes come true

At $3.3 billion, the overallotment option on Alibaba Group's IPO was more than one third the size of the total proceeds from private equity-backed offerings in the second quarter of 2014. This put the size of the third quarter IPO spike in context. Buoyed by the world's biggest ever public offering, the $34.2 billion raised is unsurprisingly the highest on record.

But it wasn't just an Alibaba story. Chinese pork producer WH Group - known as Shuanghui International until a touch of re-branding after the acquisition of US-based Smithfield Foods - pitched in with $2.4 billion, while the IPO of Australian hospital operator Healthscope raised a further A$2.25 billion ($2.1 billion)

CDH Investments, Goldman Sachs, New Horizon Capital, Temasek Holdings and Kerry Holdings did not take any money off the table, their combined interest in the company is now worth around HK$52 billion. Healthscope's owners, TPG Capital and The Carlyle Group, were able to realize proceeds of A$654 million. They still hold a 38% stake worth approximately A$1.6 billion at current market prices.

As for Alibaba, eight private investors - in alphabetical order: Asia Alternatives Management, Boyu Capital, China Investment Corp, CITIC Capital, Siguler Guff, Silver Lake, Temasek Holdings-owned Pavilion Capital and Yunfeng Capital - all made partial exits. Though tiny in percentage terms, these sales between them generated $2.2 billion. These calculations apply to the $21.8 billion offering prior to underwriters fully exercising the overallotment option, which took the total to $25 billion.

Of the GPs, Silver Lake and Yunfeng can consider themselves big winners. Silver Lake is said to have committed $300 million to the company, investing in 2011 as part of a consortium that paid $2 billion for a 5.7% stake and again as part of a $7.6 billion debt and equity fundraising effort used to take out half Yahoo's holding in 2012. The PE firm's partial exit was worth $278.8 million and it retains a 2.2% interest with a current valuation of around $4.7 billion.

Yunfeng first invested in 2011 as part of the same consortium as Silver Lake. It is sold $442 million in shares through the IPO and now has a 1.1% stake worth nearly $2.4 billion.

Alibaba's $2.2 billion contribution helped private equity exits by way of public market sales reach $6.4 billion in the third quarter of 2014, more than double the total for the previous three months and the third-highest quarterly total ever seen. It did not, however, translate into a bumper period for overall PE exits. According to preliminary data from AVCJ Research, a total of $14.1 billion was raised, compared to $15.4 billion and $14.1 billion for the previous two quarters.

The key element was the trade sale figure, which came to $6.1 billion, down from $8.5 billion for April-June 2014. Secondary sales also fell from $3.5 billion to $1.5 billion. The first quarter had Oriental Brewery and the second quarter had Queensland Motorways, the only single-hit exits in Asia to exceed $5 billion. MBK Partners' agreement to offload Taiwan cable TV operator CNS was the largest trade sale of the July-September period at $2.4 billion.

However, there is reason to believe that 2014 could yet surpass 2012 as the biggest year on record for Asian PE exits. The 2012 total was $53.5 billion. With $44.7 billion already logged for 2014, the final quarter figure could drop into the single digits and still be enough to claim top spot.

2) Fundraising: Look past China to the pan-regionals

China private equity fundraising slumped from $10.2 billion in the first quarter of 2012 to just $2.6 billion in the third quarter of 2013. The industry has since recovered from this nadir with progressively large sums raised over the first three quarters of 2014.

The revival was initially driven by venture capital. Between April and June alone, a total of $4 billion entered China-focused VC funds - 26% of the capital entering all PE funds in the region. This momentum was never likely to be sustained into the third quarter and indeed it wasn't: China VC fundraising slipped to $382.6 million. Yet China private equity continued its roll, with $9.7 billion committed to the asset class during the quarter, up from $6.7 billion for the previous three months.

However, $8.1 billion of this total went to a single vehicle - the China Minsheng Investment Fund. Set up by the former head of China Minsheng Banking Corporation, an inauguration ceremony was held for the fund in August. It was announced that 59 domestic enterprises are serving as LPs, including leading appliances maker Suning Commerce Group.

It is difficult to know quite what to believe in these situations. Numerous questions remain unanswered, notably whether the fund is governed by a traditional GP-LP structure and whether the stated amount of capital has really been committed. Chinese private equity comes in many different forms.

What is arguably more interesting about the driving factors responsible for the uptick in Asia private equity fundraising is the role of the pan-regional vehicles. Just as the China share has grown since the start of the year, so has the Hong Kong contribution - and most Asia vehicles are classified by AVCJ Research as resident in this jurisdiction. A relatively low first-quarter total of $1.5 billion was followed by consecutive three-month periods in which fundraising reached $5.9 billion and $5 billion.

This is essentially the final hurrah in the three-year process that has seen nearly all of the largest global and Asia-based PE firms raise their first regional vehicles since before the global financial crisis. Starting with Bain Capital Asia II, which reached a final close in July 2012, eight firms have raised $27.2 billion between them. In addition to Bain, they include KKR, MBK Partners, Affinity Equity Partners, CVC Capital Partners, Morgan Stanley Private Equity Asia and The Carlyle Group. The latter two closed in the third quarter of 2014 on $1.7 billion and $3.9 billion, respectively.

In all but two cases the funds are larger than their predecessors, with four finishing above target and two increasing their hard caps. It hasn't been plain sailing for all, but the continued patronage of these GPs points to two trends. First, the flight to quality in Asian private equity as LPs gravitate towards a smaller number of GPs, with stand-out performers and brand names the obvious beneficiaries. Second, when individual markets are blighted by uncertainty, there is comfort in a pan-regional strategy.

Once Baring Private Equity Asia closes its sixth fund, there is likely to be a period of more modest quarterly fundraising totals and more mid-market GPs.

3) Investment: Growth capital dominates

Characterized as a significant step in China's push to restructure state-owned enterprises by bringing in more private capital to diversify ownership, oil refiner Sinopec agreed to sell a 29.99% stake in its retail business in September for $17 billion. Private equity investors China International Capital Corp (CICC), Bohai Industrial Investment Fund Management, RRJ Capital, Haixia Capital, Goldstone Investment and Hopu Investment picked up 8.7% for just over $5 billion.

It followed another consortium deal in which the likes of Warburg Pincus, Goldman Sachs, CITIC Securities, Khazanah Nasional, CICC and Fosun International participated in a $2.35 billion investment in China Huraong Asset Management. The company, which is expected to go public, is one of four groups tasked with managing non-performing loans (NPLs) from state-owned banks.

These two transactions were largely responsible for China PE investment reaching a single-quarter high of $13.1 billion for July-September 2014. With deal flow in most other major jurisdictions either flat of declining, the China share of the Asia investment jumped to 63%, up from 30% the previous quarter. Investment was also slightly up on the April-June period at $20.8 billion compared to $19 billion.

Sinopec Marketing and Huarong boosted the growth capital contribution nearly twofold to $13.5 billion while buyouts slipped from $8 billion to $3.9 billion. It serves as a reminder that - from a China perspective - although there is increasing interest in and availability of control deals, growth capital will likely remain the lifeblood of the industry for some years to come.

How strongly state-owned enterprise restructuring features in this remains to be seen. Sinopec Marketing and Huarong are both examples of deals that are relatively rare, run as highly competitive processes, and often expensive to get into. But there is the sweetener of an all-but-guaranteed public market exit at the end.

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• Topics
• Fundraising
• Exits
• Greater China
• Expansion
• Buyouts
• Buyout
• Growth capital
• China
• IPO
• Exit
• Alibaba Group
• buyout
• Fundraising