China briefing: The great IPO freeze

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.

Last year, 57 percent of private equity-backed IPOs in China underperformed their initial listing price, according to data from Thomson Reuters. In 2011, a much stronger year for markets and deals in China, the figure was 74 percent.

Valuations suggest the market is anything but red hot. The average private equity IPO exit value fell to $167 million last year from $323 million in 2010, according to Bain & Co. figures. Other data from Thomson Reuters shows the average price-to-earnings ratio for a listed company in China during 2012 was 11.5; that’s less than India (15) and Indonesia (12.7).

Yet the Chinese entrepreneur still aspires to list his company instead of exiting via other routes. In 2012, the PRC had 83 private equity-backed IPOs (149 IPOs in total) compared to 58 trade sale exits and four secondary sales (see chart on page 50). Last year, listings were down by about half due to a regulatory freeze on the IPO process, but trade and secondary exits have been roughly the same for the past three years.

A Chinese founder may have a keen sense of risk and reward. But surprisingly, the preference for IPOs is not about the money, sources say – it’s more about cultural factors.

By listing, the founder is propelled from obscurity to become the company’s public face, which brings prestige among family and friends (and may get him on the Forbes list).

“Entrepreneurs have already made money,” says    Jean Eric Salata, chief executive and founding partner of Baring Private Equity Asia. “At some point [a listing] is about your relevance, your position and power, your legacy.”

The public visibility that a listing provides is also good for business. Banks tend to perceive public companies as legitimate (or at least vetted and somewhat transparent) entities with strong cash flow, says Daiyi Sun, managing director at Jade Invest, a China-based fund of funds. Likewise, a business that IPOs goes up a few notches in the eyes of customers, distributors and suppliers.

Equally, there is sometimes a push factor involved. If a peer company lists, it becomes much higher profile than those that remain unlisted – which will likely ignite more listing applications, Sun says.