PE firms and IPOs – again

Rumors had been circulating for several years about CDH Investments pursuing an IPO. Several bankers claimed to have pitched the idea to the Chinese GP and, of all the firms in the region, it seemed like a good fit: enough funds raised to give the semblance of a track record; multiple strategies covering private equity, venture capital, real estate and listed equities; and an embryonic regional presence.

However, CDH was noticeable as the high water mark in a shallow ocean. While its structure to a certain extent mirrored that of the large global buyout firms that have gone public - large and consistent fee streams spread over several asset classes are preferable to sizeable but unpredictable carried interest hits - it was a minute replica. Apparently CDH management never took the prospect seriously.

Saratoga Investama Sedaya was dismissed on the same grounds when very sketchy details of its impending IPO emerged. Saratoga Capital, into its second fully institutional fund, didn't seem a likely listing candidate. And indeed, it was not. The vehicle that listed was separate from the private equity firm, used by the founders to achieve a liquidity event for some legacy assets.

And now? JD Capital - formerly known as Jiuding Capital, the poster child of China's pre-IPO boom - is listing on the over-the-counter (OTC) market. The firm last week announced that it had won regulatory approval and planned to raise RMB3.54 billion ($567 million) by selling shares to 142 investors, of which 138 are classified as institutional players.

To be clear, China's OTC market, otherwise known as the New Third Board, is a platform for transferring shares in non-public companies. Market capitalization requirements and trading volumes are low. It is primarily intended to serve as a direct-financing channel for small and medium-sized enterprises - predominantly in the tech space - that don't meet the listing criteria for a full IPO.

An interesting move, though. JD said in a statement that it was turning to the OTC market in order to diversify its financing channels. Perhaps other domestic private equity firms should consider the same.

Renminbi-denominated fundraising has been on the slide for more than two years. It peaked at $12.1 billion in the third quarter of 2011 and by the same three-month period of 2013 it had fallen to just over $2 billion. High net worth individuals largely responsible for inflating the bubble are reluctant to re-up. And if they do come back, the regulatory regime will surely be tighter, potentially restricting fund sizes.
Has JD found a viable alternative?

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