IPOs, and other China exits

While this isn't expected to be a significant source of deal flow for PE players, more firms are planning the same transition. The Hong Kong Stock Exchange could do with new equity as long as investor sentiment towards IPOs remains weak - but will we see a turnaround in 2013?

There has been more activity in the last couple of weeks, with a number of companies primed for listing. Positive noises are also emanating from those in the business of making IPO predictions. After 64 companies raised a total of HK$89.8 billion in 2012 on the Main Board and GEM Board, a 65% drop on the previous year, PricewaterhouseCoopers is expecting a turnaround. It estimates that 80 IPOs will raise HK$120-150 billion in 2013.

Private equity and venture capital investors say they have a lot more waiting to go, with many tipping the second quarter of 2013 or the second half at the moment when the door opens and a torrent of PE-backed IPOs are released. However, the window is unlikely to be open long enough in Hong Kong for the full backlog to be worked through, while those seeking a mainland listing will find that the regulators simply won't open it wide enough.

According to AVCJ Research, there were 13 private equity-backed IPOs in Hong Kong last year, which raised a total of $8 billion (although the total includes cornerstone investments by GPs and LPs in offerings where it was uncertain if standard institutional and retail demand would be sufficient). This is the worst showing since 2008. In each of the three intervening years, IPOs have numbered at least 30.

The Shanghai A-share market and three Shenzhen bourses saw 81 PE-backed IPOs and proceeds of $8.5 billion. In 2010 and 2011 saw more than 120 apiece, and before that renminbi funds were still in their infancy.

Industry participants say it is difficult to see the China Securities Regulatory Commission (CSRC) approving more than 150 PE-backed offerings in a 12-month period, even if there is massive unmet demand. The CSRC has also announced plans to carry out inspections of IPO applicants' financial statements, leading Deloitte to suggest that 20-25% of firms will withdraw from the listing process in 2013. This would reduce the current backlog of 882 companies to around 660.

The size of the private equity-specific backlog is unknown - and funds' limited lifecycles means it extends well beyond those companies currently on an official waiting list. China First Capital offered some insight last week in its study of China's secondary market. It estimates that more than 7,500 portfolio companies remain in private equity firms' portfolios from investments made since 2000.

The objective of the study was to highlight the potential for secondary buyouts - most likely be larger, pan-regional private equity players - in China. Even if the IPO market rebounds, secondaries are destined to become an ever more important part of the country's PE landscape.

A total of $5.6 billion was raised through 63 trade sale exits in 2012, well down on the previous two years, but this will remain the primary exit channel for many industry participants. Secondaries bucked the downward trend, increasing 10-fold to $2.9 billion, although most of this came from Goldman Sachs selling its minority interest in Industrial and Commercial Bank of China to Temasek Holdings.

But the statistic to watch is how many transactions saw control of an asset pass between third-party investors. While it may fade into the shadows should IPOs return to the fore and hog the spotlight, the gradual expansion in this deal pipeline is a powerful indicator of the evolution of Chinese private equity.

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• Topics
• Exits
• Greater China
• IPO
• China
• Exit
• Secondaries
• Trade sale