
GPs bullish on Chinese IPOs - AVCJ Forum
Private equity investors believe it will become easier to take companies public in China as the country steps up the pace of capital markets reform, creating a system that is more in line with international norms.
“I believe the chances of the new Technology Innovation Board [in Shanghai] being a success are high. A lot of investors should consider bringing small and medium-sized portfolio companies to this board because there will be better valuations under a more market-oriented scheme,” said Lin Wang, a founding partner at CDH Investments.
The new board represents Beijing’s latest attempt to encourage domestic technology companies to list at home instead of overseas. IPOs on US exchanges have historically been the preferred option, but Hong Kong has begun to attract some high-profile offerings after loosening restrictions on companies that are pre-profit and have dual-class share structures.
The Technology Innovation Board also plans to allow listings by pre-profit businesses, which is expected to accelerate liquidity events. In addition, there will be a registration-based listing system - seen by PE and VC investors as a strong positive signal that Chinese regulators are determined to pursue international-style capital markets reforms.
“I am quite positive on the new board, which seems set to be launched in June. It will mainly be open to institutional investors and let the market to decide a company’s share price and market capitalization. This is a very positive signal,” said Sean Fan, a managing director at Goldman Sachs.
China's A-share markets are also seen as an attractive listing venue, provided companies are of an appropriate size and have appealing business models. CDH's Wang noted that the investor base, which is still dominated by retail participants, favors a good "story" involving a small and medium-sized enterprise (SME).
“We are currently selling our shares in three China-listed companies and we see some patterns. One of the three has a market capitalization of $700 million and the trading volume is 5-10x stronger than companies of a similar type in Hong Kong. The gap is 3-5x for companies with a $2 billion market cap, while companies with a market cap above $5 billion have roughly the same trading volume as those in Hong Kong. This says a lot about what investors prefer," Wang explained.
Fan added that certain business models get more traction in some markets than others, based on the extent to which investors appreciate the value in what a company does. "Say a company sells duck’s neck, how could you explain this to US investors?" he asked. "They wouldn't understand it very well."
Despite this bullishness around domestic stock markets, GPs must be thoughtful in timing their exit because domestic investors resent it when shareholders cash in too quickly after an IPO - even after lock-up periods expire. This can have a damaging effect on share prices.
“GPs need to manage their exposure to a company post-IPO very carefully," said Min Lin, a partner at NewQuest Capital Partners. "They must think about when it is right to take money off the table."
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