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PE worries over China’s IPO thaw

The IPO restart could bring back unrealistic expectations, industry sources said.

Public listings on China’s domestic markets have apparently been restarted after a 15-month freeze, with 50 new issues expected this month, according to Ernst & Young.

However, the reopening of the IPO markets is worrisome for private equity, according to a recent industry panel organised by Mergermarket and Ernst & Young in Hong Kong. 

While the panel agreed that the resumption of IPOs after regulators reformed the listing process is a positive move, they had concerns about the markets heating up too fast, resulting in entrepreneurs with access to easy money, which raises expectations.

“The biggest risk in 2014 is the opening of the IPO market,” said Derek Sulger, partner at Shanghai-based Lunar Capital. “We fear momentum in China. If 30 IPOs are hot, the index soars and retail decides equities are hot, then that’s a challenge for private equity.”

“What we really need to see is that the [IPO restart] is a sign of continued evolution of the capital markets. We need to see things happen that help businesses run better and operate at greater potential.”

Chinese banks, for example, need to be more receptive to lending to private enterprises, he added.

Eric Solberg, CEO of Hong Kong-based EXS Capital added that the IPO restart means more deals, “but probably not great deals because the expectations in terms of value and easy terms are probably going to go up,” said “Rational conversations [about valuations] will become difficult again.”

David Pierce, partner at FLAG Squadron, added that LPs are generally disillusioned with China and Asia due to unsatisfactory returns and they remain skeptical that the IPO thaw will lead to stronger returns. He predicts a volatile 2014 in Asia, with fundraising a challenge.

“In addition to the IPO window opening we need to see secondary transactions,” Pierce added. “Many assets are still being held at cost.”

The lesson from China’s IPO freeze, which Pierce believes will sink in as the market matures, is the necessity for multiple exit paths and less fixation on the IPO. 

Solberg added that the exit is important, “but you make most of the money by buying well at the beginning of the deal.”