PE backing gives Chinese IPOs an edge

Private equity backing has given IPOs on the Shenzhen stock exchange a distinct edge over the last three years, though that may be changing.

For the past three years, private equity and venture capital-backed IPOs on Shenzhen's Venture Capital stock exchange have averaged about 19 percent higher valuations when listing than IPOs without that backing, according to a research from Zero2IPO.

From October 2009 through October 2012, there have been a total of 355 IPOs on China’s Shenzhen Venture Capital stock exchange, for example. Of those, 205 were private equity/venture capital-backed, and they raised an average of $104 million each.

The non-private equity-backed listings, on the other hand, averaged only $87 million each.

“Private equity firms all have keen eyes for good companies, especially small- and medium-sized enterprises,” said Yansong Wang, managing director of China First Capital. Wang believes that private equity’s advantage is most distinct on the Shenzhen Venture exchange.

Institutional investors especially tend to trust the company more if it has private equity backing in China, Wang said.

“If it has private equity, it is by definition not a bad company” – or at least that’s how the institutional investors see it, according to Wang.

And once the institutional investors show a preference for an IPO, retail investors tend to follow suit, Wang said.

However, even though the average listing of a private equity-backed IPO was slightly higher than the nationwide average in 2012, it is still lower than it has been for the past two years, according to the Zero2IPO report.

Wang added that the good perception of private equity in IPOs may be changing.

“The CSRC has been talking a lot about private equity corruption,” Wang said, pointing especially to local RMB funds out in the less developed areas of China. Sometimes, an association with one of those unknown funds might have a negative impact on an IPO.