Hony expects an “active” 2013(2)

After a quiet year of waiting, Hony Capital is getting ready to deploy much of its $4 billion in capital in China’s depressed market in 2013, on the expectation that market conditions will improve.

2012 was a quiet year for Hony Capital – more than four investments overall in China companies, with no exits or fundraising completed. Hony’s chief executive John Zhao described the market conditions in 2012 as “tough [and] uncertain”.

“So we were just sitting around, and thought it best to beef up our attention to our existing portfolio,” Zhao told Private Equity International in an exclusive interview.

This year, however, has already started out on a different note. In mid-January, the firm sold HK$585 million (€56 million; $75 million) worth of shares from its 2010 investment in Chaowei Power, which totaled 15 percent of the company’s equity. Hony bought that stake on the Hong Kong stock exchange for an undisclosed amount, according to HKEx disclosures.

The firm is already seeing the deal pace pick up, as well, Zhao said, and expects to 2013 will continue to be “more active”. Most of these deals the firm has been working on for a year or more, but is only just seeing the window open to close them.

With around $4 billion in capital from its two funds closed in 2011 – $2.4 billion from Fund V, and RMB 10 billion (€1.2 billion; $1.6 billion) from Hony PE RMB Fund II – Hony hopes to deploy a “substantial amount” of capital in 2013.

The turbulence in the public markets had an inordinate impact on private equity activity last year, Zhao believes. Because both private equity and public markets are so young in China, their correlation to each other is just that much stronger, especially for exits.

“Exits have never that easy to start with, and the recent public market downdraft has just made exits that much harder,” Zhao said. Around 75 percent of China’s private equity exits are IPOs, according to some estimates, while worldwide the average is closer to 15 percent.

Hony has certainly felt the negative impacts of the public markets, Zhao confessed. It has delayed some deals for the firm, and the IPO backlog (now around 800 companies) has meant that Hony has had to hold on to some investments “we otherwise would have exited”, Zhao said.

However, the impact has been “bearable”, Zhao added, because Hony was careful to not invest with a pre-IPO strategy. It has been hardest for the many private equity firms that chose to focus on pre-IPO.

Despite the issues that it has created, Zhao also believes that Chinese exits will continue to rely primarily on the IPO, simply because other exit options haven’t really developed yet. Trade sales, for example, are happening, but they are few and far between – there simply aren’t enough of them to take the place of IPOs.

Zhao also believes that China’s public market won’t remain in such a depressed state for much longer. “I just don’t see fundamentals suggesting that the market will be any lower or stay in a low position for much longer,” Zhao said. There are some expectations that public markets will begin to turn around in the second half of 2013, he said.