Private equity dries up amid IPO freeze in China, India

Investors turn to other Asian markets: report

Private equity fund managers are having difficulty attracting new investor capital and realizing gains in the Chinese and Indian markets, according to a report.

"With two of Asia's largest economies facing a tricky private equity landscape in 2014, investors are likely to put their money to work in other parts of the region," an analyst, citing "some limited partners", said in Dow Jones' 2014 Global Outlook & Review.

China-focused fund managers are having trouble relying on the IPO market as their main exit route because of a freeze in the Chinese IPO sphere. Consequently, returning investment capital to limited partners has "been hard to achieve" and "remains a major concern," according to the report.

Early last week, five Chinese companies said they would postpone IPOs after the Chinese Securities Regulatory Commission sought to tighten oversight on companies trying to list in China. The commission had just lifted a 15-month ban on domestic IPOs as it looked to curb high-priced listings to protect investors. One company that suspended its public offering, Jiangsu Aosaikang Pharmaceutical, priced shares at 72.99 yuan (US$12.06), making its price-to-earnings ratio 67 times more than its 2012 earnings, according to the South China Morning Post.

For the past two years, companies from China have delayed IPOs in the US after a string of accounting scandals revealed that many Chinese companies which went public were worth less than claimed. Listings picked up in the latter part of 2013, but overall activity remains tepid.

"Because of the closing of the local IPO exit route, it's caused a lot of problems for a lot of local private equity funds in terms of renminbi and US dollar-denominated funds," said Vincent Ng, partner at Atlantic-Pacific Capital. As of the end of 2013, "regulators have indicated and have initiated the resumption of IPOs of a number of companies, so the unthawing of that exit route is a silver lining to a lot of private equity funds," he said.

Despite that development, there's been a "pent-up demand" for the type of liquidity that investing in an IPO would provide, Ng said. How much investors will get out of a listing is "subject to debate" and because the backlog of companies waiting to list is huge, it will take time for fund managers to realize their gains, he said.

"At the end of the day, the IPO exit only provides [limited] liquidity, because for a lot of the growth, equity companies outside of Alibaba and whatnot, oftentimes the trading on the shares is going to be limited," he added. "Actual distribution of capital back to investors will still take a bit of time."

More than 9,000 deals were completed in China in the past decade but more than 7,500 have not been able to cash out, according to the report.

"Japan, Korea and Southeast Asia are attracting more dollars that might have previously gone into China and India," said Hugh Dyus, head of Asian private equity at Macquarie Funds Group. There is "greater realism" towards China and India these days, he was quoted by Dow Jones.

amyhe@chinadailyusa.com