Report: China PIPE yields meagre returns

As the stock price for Xindaxin Materials remains depressed, the exit for an escort of domestic GPs from their PIPE investment in the company doesn’t look promising.

A venture capital-backed Chinese photovoltaic materials manufacturer, Xindaxin Materials, announced a restructuring and joint venture with its competitor Pingdingshan Shenma, but the restructuring doesn’t hold out much promise for a good exit in the near future, according to a 21st Century Business Herald report.

The restructuring will also bring in some state investment backing and issue the company’s shares valued at RMB 6.41 a share. However, this was not the promised return that the company made to its escort of 13 venture capital investors, which included Henan Huihe Investment Center, Shanghai Xixin Invesment Management, and National Trust Hongsheng Venture Capital.

These 13 firms invested in Xindaxin and some of its subsidiaries in January of 2011 in a PIPE deal, collectively buying 26 percent of the company’s shares at RMB 6 a share. The announced restructuring will give the investors a gain of only 3.5 percent, according to the report.

As if to make up for it, Pingdingshan and Xindaxin have committed to increase the stock price to RMB 10 per share within ten months of restructuring. If they do not succeed, the companies will undergo another restructuring.

At the same time, the venture capital investors have also committed to a 12-month lock-up period with the company, the report added.

The China stock market has been inactive in 2012, and this has impacted private equity returns in the country. A fake IPO scandal earlier in the year has made the China Securities and Exchange Commission tighten its regulations on all IPOs. In August, for example, only eight private equity-backed companies managed IPOs on China's stock exchanges, according to Thomson Reuters data, and the backlog for China IPOs has reached 800 companies, by some accounts.

However, private equity take-private deals of Chinese companies has increased dramatically in the past few months, as many firms look forward to a recovery on the Hong Kong and China stock exchanges, according to David Roberts, partner at O'Melveny and Myers.