Private equity exits in China have been rare in recent years due to domestic regulatory issues and structural shifts in its economy. But private equity limited partners (LPs) have called for their return.
Exits from Chinese investments have concerned LPs since Chinese regulators closed the country’s initial public offering (IPO) market in late 2012. The government’s plans to establish a more market-driven economy might also exacerbate exit difficulties.
|
|
"My personal view is that I prefer general partners to sell" |
|
|
Regardless, LPs speaking at the Hong Kong Venture Capital Association’s China Private Equity Summit last Friday agreed that they appreciate GPs who don’t hold onto investments.
Lawrence Wong, senior-vice president of Auda Asia, said that he’s happy that general partners are becoming more conscious of divestments and exits. He believed that this is a good down cycle for private equity, ensuring general partners rely less on IPOs. He expected to see trade sales or redeeming shares – selling them back to founders – to return cash to investors.
“Exit channels will be more diverse and the liquidity in the PE market will improve in the next three to five years,” he added.
KEY TAKEAWAYS
LPs encouraged private equity firms to look beyond IPOs to complete exits, and consider options such as trade sales and selling their stakes back to founders;
Exit rates have been dismal in China, with an annual rate of decline of 30% in terms of value since 2010;
It’s important to maintain portfolio companies every year. But GPs must not hesitate to divest investments that aren’t meeting expectations so that they can recycle capital.
Exit rates have been dismal. Bain & Company’s Private Equity Outlook 2014 revealed that private equity made $21 billion in 109 exits in 2013, compared to $63 billion in 256 exits in 2010 – an annual rate of decline of 30% in terms of value.
But private equity returns across geographies have been broadly similar over the last 10 years, observed Doug Coulter, partner at global fund LGT Capital Partners. Where China clearly hasn’t performed during the previous two to three years has been cash distributions. “That’s really one of the reasons why many LPs have lost interest in the Chinese private equity story,” he added.
He encouraged GPs to keep investing in China. Emerging markets broadly have been out of favour, but private equity is a long-term asset class, he added. When he talks to investors, he said that it’s clear– at least in our view – you have to deploy and recycle. “Money is needed in the ground every vintage year because you don’t know in advance what a great vintage year is going to be,” he added.
The Bain survey revealed that nearly two-thirds of fund managers plan to hold onto aging investments. But that might not be the right approach.
“My personal view – not that of my firm – is that I prefer general partners to sell,” said Wong.
This shows that GPs have the capability to manage their portfolios, he added. If an investment isn’t good, they can sell it and return cash to investors. It also releases their capacity for making new investments, instead of spending resources on existing portfolio companies.
See also
China private equity enters new phase
HK IPO marks China take-private first
APAC acquisition financing: the alternative funding sources explained