US listing costs tipped to create more China take-private opportunities

At the Hong Kong Venture Capital & Private Equity Association's China summit, Lorna Chen, a partner with law firm Shearman & Sterling, said that increasingly onerous reporting and transparency requirements for US-listed companies are causing Chinese firms to question the value of staying in the country.

"They knew there were lines, SEC [Securities & Exchange Commission] listing, and information disclosure, but the pure cost of compliance has been unmanageable for them," Chen said. She added that the threat of litigation by shareholders is another reason for Chinese companies to sour on a US listing.

The previous wave of China take-privates came on the back of corporate governance scandals involving a number of US-listed companies. Valuations dropped substantially as US investors lost faith in almost all small and mid-cap China stocks, and private equity investors supported a host of privatizations. The general aim was to re-list in China or Hong Kong.

Victor Yang, director of the direct investment department at Ping An Trust, cited the take-private of online game developer Giant Interactive as an example of the type of deal that might become more popular in the future . The company was taken private last year in a leveraged buyout by a consortium including Baring Private Equity Asia and Hony Capital for $2.9 billion. Ping An was one of the banks that provided financing for the deal.

"I think it still holds very true, certainly after the equity market value in the Asia market, that we still see a very strong arbitrage opportunity between the US and markets in Asia," Yang said. Another attraction for the holders of Giant was its strong earnings, on top of its valuation. While the investors expect to exit the company through a relisting eventually, its revenue-generating ability will serve its backers well in the meantime.

Jie Lian, a founding partner at Primavera Capital Group, said that while a re-listing on a Chinese stock exchange might seem a natural exit route, management should be wary of following the pack.

"Chinese entrepreneurs many times just want to follow whatever the market is doing; if it's very popular they will do it," Lian said. "But I always advise them to be careful about the objectives." He said that for some companies, staying private, and the freedom it provides, might best help managers achieve their goals, while in other cases even a relisting in the US might be feasible.

"It's not the end of the world, actually, after three years to be relisted in the US," Lian said. "In history there are actually many companies that go IPO, take private, IPO; they can do several rounds. So it's really a different consideration."

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• Topics
• Greater China
• North America
• Buyouts
• GPs
• China
• USA
• Primavera
• buyout
• IPO
• Exit