PE firms cash in China investments as equity prices soar
Private equity firms are cashing in on their China investments at a quick pace, as soaring domestic stock markets push valuations to record levels.
The speed at which PE stakes are being sold has been accelerated by firms’ disappointment in the returns generated by their Asia investments.
However, some PE firms have been regretting their decisions to sell equity stakes after valuations continued to surge months after they made their exit.
Gabriel Li, managing partner of Orchid Asia Group Management, made the intentions of his PE firm clear during a panel discussion at the HKVCA China Private Equity Summit in Hong Kong yesterday.
“We know that this is a period where we have to sell,” Li said.
Li revealed that Orchid Asia has completed four sales of portfolio companies over the last two months. The China-focused PE firm plans to offload stakes in nine more portfolio companies this year.
“We’ll see if we can get nine done as the bubble continues to moderate,” Li said.
To put that target in context, Orchid Asia invested in about 70 companies between 1993 (when it raised its first fund) and 2014 (when it closed Fund VI), averaging around 14 per fund.
The urgency for PE funds to exit investments was highlighted in consulting firm Bain & Co’s 2015 Asia-Pacific Private Equity Report, published in April, which stated that limited partners (LPs) have been “disappointed by anaemic distributions and sliding average returns” from Asia PE.
Last year, distributions (or capital returned) to LPs investing in Asia-Pacific PE exceeded new capital calls for the first time. But that was partly driven by one-off events such as Alibaba’s initial public offering (IPO) and a strong year for realising gains in large markets such as Australia and Japan.
The prospect of more China exits is raising investors’ expectations for strong distributions this year. “I am bullish about unrealised, although exciting, opportunities in China,” said Hong Kong-based Eric Mason – managing director of the $12 billion AUM Church Pension Fund – during his opening keynote address to the forum. “Embedded value stands out in China,” said Mason, referring to unrealised investments which have made paper gains.
“It’s very difficult to understand when to sell,” said Li, pointing to an exit a month ago at a 66 times price-to-earnings ratio, only to see that company’s share price double to a 120 times multiple after the sale.
“We sold all of our stock in the first hour” after the lock-up period ended, Li said. “There are few fundamentals to [suggest that] 66 times is too low."
At the same time, high valuations make the “investment side even more challenging,” Li said. “We are slowing down the pace of our investments in response to this.”
Orchid Asia closed its sixth fund in August 2014, raising $920 million – or $170 million more than the $750 million targeted when it started fundraising in March 2014.
Speaking on the same panel, Wang Lihong, managing director of Bain Capital Asia, said that she was happy to be “more focused on liquidity and fundraising rather than investing” at the moment.
Bain is raising its third pan-Asia fund, Bain Capital Asia Fund III, as reported.
Wang said it was more difficult for Bain to take advantage of high valuations to exit investments as it owned majority stakes in the Chinese companies that the PE fund had invested in. This meant that, after the IPO, the fund still faced a three-year lock-up period before it could exit, unlike minority investors. “For smaller shareholders, it’s easier to take advantage of market highs. For us, the regulatory hurdle is still high,” she said.
“Buyout investors look to certainty and post-IPO freedom to raise funds,” said Wang, pointing to these factors as reasons to prefer a Hong Kong IPO when it came to exits.