In theory, Chinese entrepreneurs should have a deep aversion to the IPO. On foreign exchanges, almost all Chinese companies are undervalued – and have a dubious reputation, due to the various accounting scandals at several of them. In China, there’s a 600-odd queue (i.e. a four-year wait) for listing on a weak stock market that doesn’t offer much hope for a jackpot debut.
THE TROUBLE WITH TRADE SALES
Trade sales to corporate strategics would be an obvious alternative exit route, particularly to cash-rich Japanese buyers seeking expansion offshore.
Last October, China’s regulators froze IPOs in order to re-check the financial data of companies on the waiting list. According to Jade Invest’s Sun, some underwriters sexed up company performance data to impress investors during the road show and approval process (which may account for some of the subsequent underperformance).
“We’re getting to a point where secondaries and other alternatives end up being a bigger piece of the pie,” says Jon Parker, partner at KPMG China. “[However] more so in China than in other markets, what’s important is the mystique of being a public company, and the circles that puts you in.” n
Focus on… Regulation
China’s new leadership aims to tidy up an industry whose rapid growth has created some bad habits. By Michelle Phillips
In March, China’s once-a-decade leadership change was officially completed, as Hu Jintao handed over power to successor Xi Jinping. The new leadership has wasted no time in trying to better regulate the financial industry.
Nonetheless, the spate of new regulations shows that China is finally trying to bring order to its domestic private equity industry, to prevent it growing wild in a loosely-regulated environment. n
Focus on… RMB FUNDS
As IPO-reliant RMB funds come to terms with the stalled exit market, the more nimble strategists are seeking new ways to thrive, write Clare Burrows
The four year-long backlog of IPO applications in China has thousands of RMB fund managers, reliant on the country’s stock exchanges to exit, in a bind. As their pre-IPO strategy falters, and funds reach the end of their lives, they face growing pressure from LPs.
“Those that are most exposed to international practices and are most sophisticated [will] have done some revisionist history and [will] try to explain why [they used] their previous strategy and [begin] talking about the things that foreign LPs want to hear, such as post-investment value-addition [and] long-term holding – and [thereby] distance themselves from their more speculative, opportunistic, pre-IPO pasts.”