private equity secondaries China

Direct Secondary Investment Opportunities in China Private Equity

 

As detailed follow-up to our report on the current challenging crisis of unexited PE investments in China, China First Capital has prepared a new research note. You can download the abridged version by clicking here.

This note provides far more detailed data and analysis on the unexited PE deals: by industry, original deal size, currency, round, and most importantly, “tier of PE”. This should give a more concrete understanding of the current opportunity in direct secondaries in China, as well as numerical challenges all GPs active in China will face exiting.

China First Capital is currently the only firm with this data and analysis. In addition to this note, we will also share in coming weeks three others research notes:

1. Secondary deals modeled on prospective IRR and hold periods
2. Risk-scoring metrics for primary and secondary deals in China
3. Portfolio analytics specific to primary and secondary investments in China

Beyond this work, shared as a service to our industry, to help facilitate the development of an efficient and liquid exit channel of direct secondaries in China, everything else will remain our confidential work product to be deployed only for clients that retain us. An introduction to our secondaries services is available by clicking here.

 

Private Equity Slows in China as Investors Can’t Find the Exit — Institutional Investor

II

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12 FEB 2013 – ALLEN T. CHENG

China’s once-booming private equity industry is facing a logjam as a dearth of exit possibilities is slowing the flow of new deals in the sector, analysts and industry executives say.

The volume of private equity activity slowed dramatically last year, with some $17 billion invested in more than 700 companies, down from more than $30 billion invested in more than 1,700 companies in 2011, according to China First Capital, a Shenzhen-based investment advisory firm. Virtually all deals in China are minority equity investments in fast-growing private companies rather than buyouts of public companies as in the West. The industry was virtually nonexistent in China at the start of the 2000s but grew rapidly as Western investors rushed to participate in the country’s economic boom.

“You had an industry that grew very quickly but is not yet fully matured,” says Peter Fuhrman, chairman and CEO of China First Capital. “The PE firms raised huge money from LPs around the world and now face the challenge of not being able to exit their investments before the life cycle of their funds run out,” Fuhrman says. More…

 

China Private Equity Secondaries — New York Times, Bloomberg, CNNMoney

Dual

It is imperative for the private equity industry in China to develop an efficient, liquid market for secondaries. Our goal is both to facilitate an active dialogue, as well as help bring this about. Only by breaking the current logjam of no exits in China PE can money again start to flow in significant amounts to capital-hungry private companies. No less than the future fitness of China’s entrepreneurial private sector is at stake.

In the last several days, along with the Wall Street Journal article posted yesterday, five other financial media (New York Times, Bloomberg, AVCJ, PEI, CNN Money) published stories on this topic, referencing research results from China First Capital. I’m pleased to share them.

Private Equity in China: Which Way Out?

HONG KONG — Welcome to the private equity game in China: you can buy in anytime you like, but you can never leave. At least, that is how it is starting to seem for many of the firms that bought in big during the boom of last decade.

Starting from a base of almost nothing in 2000, global private equity funds and their start-up local counterparts rushed into the Chinese market – completing nearly 10,000 deals worth a combined $230 billion from 2001 to 2012, according to a report released this week by China First Capital, a boutique investment bank based in the southern city of Shenzhen.More…

 

Private-equity funds in China are still holding 82 percent of the companies they’ve invested in since 2007, as the frozen market for initial public offerings keeps them from exiting, a study showed.

Funds hold 6,584 companies after disposing of 1,445 and seeing 20 go bankrupt, according to a report from China First Capital, a Shenzhen-based firm that advises on private equity and mergers. Investors still hold companies valued at $94.3 billion, compared with a total of $194.7 billion, according to public data compiled by the firm and its own research. More...

 

 

At least 200 private equity portfolio companies in China are attractive targets for potential secondary buyers and the number is likely to grow 15-25% per year as funds come to the end of their lives and find that exit options are still limited.

These companies represent the cream of a much larger pool of investments that are as yet un-exited by Chinese PE investors, according to a proprietary study by specialist investment bank China First Capital. It estimates that more than 7,500 portfolio companies remain in private equity firms’ portfolios from investments made since 2000.  More…

 

As other exit avenues for private equity dry up in China, GP-to-GP secondaries could be the only option for the 7,500 unexited portfolio
companies, according to a recent study from China First Capital.

China has 7,550 unexited private equity investments totaling $100 billion that will soon have to be realised through routes other than the traditional IPO, according to a recent study from China First Capital.
As fund lives begin to expire, Peter Fuhrman, chairman and chief executive of CFC, believes the standout option will be GP-to-GP secondary transactions. This is especially true for RMB funds, which have a three-to-five year life rather than the ten years typical with US dollar funds. More…

China’s stalled market for new share listings is severely limiting the ability of private equity funds to cash out their
investments in the country, according to a new research report from China First Capital.
The Shenzhen-based investment bank analyzed more than 9,000 private equity and venture capital deals completed in
China since 2001, and found that more than $100 billion — much from the U.S. — remains invested. More…

 

Private Equity In China – Time For A New Exit?

Article from Wall Street Journal January 8, 2013

China was once one of the few bright spots globally for private equity. Now it’s a quagmire – and investors are going to have to change the way they approach the market.

That’s the finding of a new report by Shenzhen-based private equity advisory China First Capital (pdf). According to the company’s own research, there have been about 9,000 private equity deals completed in China over the past decade, but in more than 7,500 of those instances – or $130 billion worth of investment – investors still haven’t managed to cash out.

“Over the last 18 months, first the U.S. capital markets, then Hong Kong’s and finally China’s Shanghai and Shenzhen domestic stock markets have dramatically lowered the number of IPOs of Chinese companies,” writes Peter Fuhrman, China First Capital chairman, in the report. “It seems more likely than not that the golden age of Chinese IPOs, when over 350 companies were listing each year across public markets in the U.S., Hong Kong and China, is now over.”

It’s not a turn of events that will be easily remedied. A wave of fraud allegations leveled by auditors and short sellers against a number of small Chinese companies listed in the U.S. has destroyed investor confidence in the sector and all but frozen new IPOs. Listings in Hong Kong dropped off in 2012 owing to that market’s poor performance, but even if it recovers many private-equity-invested companies are too small to clear the Hong Kong bourse’s listing requirements. And in mainland China, the regulator has all but stopped new listings in Shanghai and Shenzhen for fear that new offerings would divert liquidity and drive lower two of the world’s most underperforming markets.

Analysts tip China’s domestic IPO market to come back to life this year. PricewaterhouseCoopers expects a combined 200 IPOs raising between 130 billion yuan ($20.7 billion) and 150 billion yuan on the Shanghai and Shenzhen stock exchanges in 2013, it said in a report. But that’s not going to clear the private equity backlog.

About 100 companies have already been cleared by the China Securities Regulatory Commission to list their shares, but are waiting for the market to improve. A further 800 companies have already filed IPO applications and are waiting for regulator’s nod. And according to Mr. Fuhrman, an additional 600 or 700 companies could be ready to apply as soon as the regulator signals it’s fully ready to take new applications. With many funds needing to return cash to their investors in the not-so-distant future, waiting for an IPO slot to open up is looking like the financial equivalent of a Hail Mary.

Traditionally, IPOs have been the preferred way for private equity investors in China to get their money out of companies they invested in. That’s in part because during the golden years of 2006 and 2007, sky-high IPO prices would result in a killing for investors that got in early. But it’s also because finding another company willing to buy the company you’ve invested in – a popular exit for private equity investors in developed markets – is seldom an option in China. Private equity investors usually take only a minority stake in Chinese companies, often because the entrepreneur who founded the firm is unwilling to relinquish control.

“To achieve [a] trade sale exit, the [investor] would need to persuade the majority owner, usually the person running the company, to sell out,” said the report. “Even in cases where that is possible, there is not an active market for corporate control in China. Few deals have been successfully concluded where a private entrepreneur, alongside a PE minority investor, has sold the business.”

The answer to this investment exit quandary might be secondary deals, whereby one private equity fund sells its stake in a company to another private equity fund, or in some cases sells its entire stable of companies to another fund. So far there have been very few such deals in China, but Mr. Fuhrman thinks they could be the way of the future.

“Despite the current lack of significant deal-making activity in this area, secondaries will likely go from current low levels to gain a meaningful share of all PE exits in China,” says the report.

Secondary deals are usually unpopular among investors that give their money to private equity funds. Large investors who have allocated money to a number of private equity shops see them as a waste of their money, particularly if one fund they’ve invested in sells to another fund they’ve invested in – all the more so if it’s at a higher price.

Secondary deals overseas often involve distressed assets – the kind a private equity fund is willing to sell at a loss just to be rid of them. But the deals Mr. Fuhrman foresees coming to the table in China would be of much higher quality, with funds forced to sell because they’re due to return cash to investors rather than because of any underlying problem with the investment.

The current quagmire is a problem that’s been building for some time, and private equity funds have so far proven reluctant to embrace secondary deals as an exit. But with the chances of getting an IPO done looking less like a bottleneck and more like the eye of a needle, major changes might be forced upon funds and the way they do business.

– Dinny McMahon