Strong exit pipelines set to continue for Chinese PE firms

Private equity sales are continuing apace in China, despite A-share turbulence which has hit the domestic IPO market. Strategic buyers are set to support the PE exit pipeline in coming months, say industry players.
Strong exit pipelines set to continue for Chinese PE firms

Private equity sales of Chinese companies are surging ahead without a dependence on IPO exits, according to industry players.

Amid a chaotic summer for Chinese equities, which has hit the previously thriving IPO market hard, PE sales are set to continue apace as individual buyers remain willing to facilitate exits.

But it comes as mergers and acquisitions in China are predicted to slow this year because of A-share turbulence.

Chinese PE sales do not depend on “IPO hype” said Niklas Amundsson, Hong Kong-based managing director of Monument Group, which finds investors for PE general partners (GPs) seeking to raise new funds.

Amundsson said that “no one is telling us less than 3x” for exits they have lined up for later this year, referring to the multiple of the original investment amount.

Around half of sales lined up are to strategic – or corporate – buyers, “so even if the market doesn’t recover then half of those exits will happen anyway,” said Amundsson.

Still, the market does need to stabilise, acknowledged Amundsson. “I don’t think that there is a lot of confidence [among investors] that all these exits will happen,” he said, adding that “investors are in a wait-and-see mode”.

When valuations of listed A-share companies fall, it becomes harder for them to execute M&A, observed David Brown, PwC’s China and Hong Kong transaction services leader. He said he expected China M&A activity to slow in the second half of 2015, “primarily because of turbulence in equity capital markets”.

Brown observed that foreign inbound M&A – where overseas companies buy Chinese firms – is less likely to be affected by turbulence in A-share markets. But foreign inbound strategic buyers accounted for only 3.5% of Chinese M&A in the first half of this year, according to figures released by PwC last week.

That is less than domestic companies spent on buying companies outside China – which accounted for 14.1% of Chinese M&A activity, including firms based in Hong Kong.

A domestic China-on-China M&A drive has been driving the country’s M&A boom, said Brown, who expected 2015 as a whole to be a record year following the blow-out first half of the year.

Chinese companies spent $232 billion buying other domestic firms in the first half of 2015, accounting for 66% of Chinese M&A. Financial buyers – venture capital and PE firms – accounted for the remaining 18.1%.

Technology deals accounted for the most VC/PE activity, with $30.2 billion worth of such deals completed in the first half of the year, compared to $23.5 billion in 2012, 2013 and 2014 combined.

Brown said that “the closure of the A-share market has a positive effect on PE firms” to the extent that companies in need of financing look more to PE firms than a stock market listing.

Furthermore, Brown predicted that “outbound PE will pick up again,” after opportunities at home amid the earlier stock market boom had overshadowed opportunities abroad.

Amundsson observed that GPs were seeking to give themselves the flexibility for China outbound and buyout deals to account for around a third of the investment mandate for new funds raised.

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