IPOs for Asian PE firms: Too hasty?

Having spun-out from China International Capital Corporation (CICC) in 2002 when regulators banned brokerages from owning direct investment divisions, CDH carved out a niche for itself in the growth space.

Over the ensuring decade, four private equity funds have been raised, most recently a $1.45 billion vehicle in 2009, and the firm has also moved into new assets classes and geographies. With more than $7 billion under management, CDH does venture funds, renminbi funds and real estate. Offices have sprung up in Singapore and Jakarta to complement a typically robust presence in Greater China.

According a couple of investment bankers - in conversation a couple of years ago, before the IPO market tanked - several of the usual suspects have pitched CDH's management team on the possibility of a public listing. It is unclear how detailed these discussions became, but nothing concrete has emerged.

One of these bankers proceeded to give an elegant explanation of how management fees and carried interest generated by a private equity firm translate into an EBITDA multiple that might be used as the basis for a valuation. The message was clear: large and consistent fee streams - and therefore assets spread over a variety of classes - have more weight than the potentially sizeable but perhaps unpredictable carried interest checks.

This explains why the global buyout firms made efforts to diversify operations ahead of their IPOs. Real assets - infrastructure, energy and real estate - came to the fore, alongside fund-of-funds, hedge funds, and structured credit. It also explains why most of the largest Asian GPs wouldn't consider a public listing right now. Based on private equity assets alone, even the longest standing regional buyout players are only on Fund IV or Fund V.

So why is Saratoga Capital looking to do an IPO in mid-2013? The Indonesian GP has around $2 billion under management and closed its second institutional fund - and third overall - last year.

Admittedly, details are still sketchy. It appears that Saratoga InvestamaSedaya, the private equity unit of Saratoga Group, would be the listed vehicle, but there is no indication of how large a stake in the business would be offered to investors or how much the company wants to raise. Or why it wants to engage in the exercise in the first place.

One reason for a private equity firm to pursue an IPO is that it creates liquidity for founders who may be looking for an exit. Another reason - and this has more in keeping with the long-term development - is that it creates a permanent balance sheet. Once listed, a private equity firm has a capital reserve outside its funds that can be topped up without calling on LPs. This means a firm can participate as an LP in its own funds, perhaps seeding new concepts, and also pursue wider business objectives. Stock options can even be granted to employees as incentives.

What we do know is that Saratoga InvestamaSedaya wouldn't be the first Saratoga Group subsidiary to go public. The problem is this doesn't tell us much: Provident Agro, the unit in question, which completed its IPO last year, is palm plantation operator.

Further conjecture is unwise. Although IPOs by Asian private equity firms might be a virtual certainty, we don't know what form they would take or, for that matter, how they would be received. Even with the luxury of an exit within minutes rather than years, would institutional investors bite?

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• Topics
• GPs
• GPs
• Saratoga Capital Group
• CDH Investments Management
• IPO