Macro, geopolitical concerns not deterring China exits

“Public markets are placing a premium on growth because the world is anemic on growth. We still see a meaningful pop in valuation between what is on the GP’s books a quarter or two before the IPO and the IPO process itself. This is amplified by a tremendous after-market performance,” Jie Gong, a partner at Pantheon, told the Hong Kong Venture Capital & Private Equity Association's (HKVCA) China forum. “How long that lasts we don’t know, but I think interest rates are going to be sustainably low for a long time.”

Nearly 120 PE-backed Chinese companies have raised a combined $23.3 billion through IPOs so far this year, compared to $27.8 billion from 88 offerings for the whole of 2019. The distribution of listings among different bourses is instructive, with Shanghai’s Star Market responsible for $9.6 billion from 43 IPOs. The US comes next with $5.4 billion from 13 offerings, followed by the Shanghai A-share market ($2.8 billion from 17) and Hong Kong ($2.8 billion from 12).

“Many companies we look at are gearing up for IPO on [the Star Market] instead of Hong Kong or the US, where they have geopolitical concerns,” said Chang Sun, China managing partner at TPG. “The change in the approval process in China – instead of going through a lengthy approval process, now you can just register – means there is a lot more certainty in terms of being able to predict when you can list and when you can get out.”

At the same time, TPG has found Hong Kong to be an attractive location for anything healthcare-related. Earlier this year, one of its portfolio companies, Kanji Medical Holdings, chose Hong Kong over the A-share market because the founder was unwilling to acquiesce to requests for disclosure of his personal bank accounts. The company raised HK$3.1 billion ($400 million) without doing a formal roadshow – the process took just 165 days – and it is currently trading at an 82% premium to its IPO price.

“There is a window theme [to IPOs]. There is also a rotational theme,” said Sun. “Investors like to rotate from cyclicals, to healthcare to value plays. Now it’s anything healthcare-related. Even if you have a biotech company that is five years from the first dollar of revenue you have a sky-high valuation.”

Hong Kong has also become the bourse of choice for US-listed Chinese companies making secondary listings as a hedge against potential regulatory problems in the US. At the same time, businesses considering IPOs are said to be weighing their options, with Hong Kong a back-up if the US becomes too risky. At issue is legislation that – if passed – would require Chinese companies to comply with US accounting regulations within three years or face delisting. China currently refuses to allow US auditors to conduct on-site inspections of local companies.

Nevertheless, US exchanges are still actively courting Chinese businesses. The New York Stock Exchange recently shipping a replica of its opening bell to China so founders have something to ring even though they can’t venture on to the trading floor in person.

“It is physically located here for virtual listings – they’ve done it twice in the last two weeks,” said Frank Tang, chairman and CEO of FountainVest Partners. “We are hearing all these mixed signals and the bankers have been telling us that the US listings are not affected. But people have to figure out whether it is a long-term sustainable solution for Chinese companies. Hong Kong is becoming a more and more viable market, where valuations are in favor of investors.”

TPG Sun added that capital flows are more important than listing venues. If Chinese companies cannot go public in the US, they will do so elsewhere – and capital will follow them. He noted that BlackRock and Fidelity, both US institutions, came into the cornerstone placement for the Kangji offering. This is said to be the first time the two groups have participated in the same cornerstone.

Liquidity is not limited to the IPO markets, according to Leon Meng, founding managing partner at Ascendent Capital Partners, a mid-market investor that has relied on trade sales for 60% of its historical exits. The GP agreed to make a full exit from Ningxia Harmony Dairy Development earlier this year, with New Hope Dairy set to buy the business for RMB1.7 billion ($240 million). Ascendent’s 45% stake will be sold in two tranches.

More recently, the firm put another portfolio company up for sale and was surprised at the level of strategic interest. “It’s not a very sexy sector, I was thinking that two or three reliable buyers would be a good outcome,” Meng said. “Getting nine real bids illustrates how flush liquidity is in the market, both primary and secondary.”

He added that strong demand is to be expected for strong businesses: “If you have a good asset that you manage well and work on for a number of years, there will always be a buyer. They like stable growth and the fact you have run the business well and it has a strategic significance in its market.”

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• Topics
• Greater China
• IPO
• Trade sale
• China
• HKVCA
• TPG Capital
• Ascendent Capital
• Pantheon