PE exits in Hong Kong raise hopes

The Hong Kong stock market has had two PE exits in as many weeks, activity that some believe signals a broader revival in Greater China's public markets.

Two exits may not make a trend, but they shouldn't be ignored either. In January two private equity firms divested China investments on the Hong Kong stock exchange, raising hopes for IPO momentum in 2013 .

Hony Capital 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 Carlyle Group, as well, completed its sixth block trade sale exit of China Pacific Insurance Group earlier in the month, which reports placed at $200 million. This gave Carlyle a 6x total return on its original 2005 investment in the company, Private Equity International reported earlier.

By comparison, during the entire fourth quarter of 2012, the HKEx had only $216 million raised across one private equity-backed IPO, according to data from Mergermarket.

William Shen, senior partner and head of Greater China at Headland Capital Partners, believes the January exits are an indication that Hong Kong’s public markets have “finally come back to life”. Given the Hong Kong stock exchange's filing requirements, most firms will choose to exit investments in chunks rather than in many little bits, and it’s simply a matter of waiting for “the right price”, he said.

Shen said around 80 percent of Hong Kong listings are China companies. “Without China, there would be no Hong Kong stock market.”

Exiting a Chinese company on the Hong Kong stock exchange will depend on the size of the company, he added. A large company, such as a state-owned enterprise, will probably have a similar or better valuation on the Hong Kong stock exchange than it would have on China’s stock exchanges because of its size.

Smaller companies (under $100 million), however, will not be able to get great valuations on Hong Kong's stock exchange simply because they are so small, and will probably turn to the A-share market even though it is slumping.

Exit pressure grew throughout 2012, as many funds are coming to the end of life and public markets in much of Asia performed poorly or were flat.

A recent PricewaterhouseCoopers report suggested that 2013 may end up a record year for private equity exits in China, but private equity Greater China leader David Brown says that will depend on how long it takes for China's public markets to sort themselves out. More than 800 companies are in the queue for IPO approval in China. 

Chinese companies aiming for a public listing may soon have another stock exchange open to them. Media reports say that Guo Shuqing, chairman of the China Securities Regulatory Commission, will visit Taiwan’s financial supervisory commission head Chen Yuzhang to discuss ways for mainland companies to list on the island's stock market.