A secondaries trading platform set in motion by the Shanghai Pudong Finance Service Bureau is likely to offer lower quality assets to secondary buyers than those found via intermediaries or existing industry networks, according to Dayi Sun, managing director at private equity firm Jade Invest.
The bureau announced in April it would create a platform for private equity GPs and LPs to cash out their investments via secondary sales in response to a clogged exit pipeline in China caused by an IPO freeze. The platform is intended to make sales to other private equity players more accessible and efficient, making one-on-one relationships less necessary for firms to make a sale.
However, assets will likely come to the platform only if they have sparked no previous interest from potential buyers, some sources believe.
“If [it is] a high-quality secondary transaction then it will be picked up immediately. It could be that only the [underperforming] ones, the ones that no one wants, are thrown onto such a platform,” Sun told Private Equity International.
“Even in the US and more mature markets, a lot of transactions are still being done through direct relationships or more through different agents. Such agents are not government-sponsored, they are just placement agents or market [players] that specialise in gathering secondary transactions for sales.”
Francesca Cornelli, professor and chair of finance at London Business School said some low quality assets could come to the platform, however, it is only concerning if they are sold under the guise of being high-quality assets as this can cause a break-down in the market.
“For an economist, the problem is not low-quality, the problem is high-quality being mixed with low-quality. If you have low-quality assets that’s fine, they will trade at a discount, but [it will work] as long as they trade at a fair price,” she explained. “It would almost work better if people said 'This is where you sell low-quality assets', [because the worry is otherwise] you just have no way to distinguish.”
Cornelli added that while the impact of the programme is yet to be seen, the move by the Shanghai regulator is positive and will at least serve as a learning experience for the Chinese private equity market as to whether such a trading platform is a feasible structure for the secondaries market to operate in.