With slim hope of exiting through a lucrative public listing, Chinese entrepreneurs and their investors are considering sales.
China's huge backlog of initial public offerings is creating an exit crisis for maturing private equity funds - and an opportunity for international investors interested in buying something other than a bit of a state-owned enterprise.
For China's entrepreneurs, the dream of earning a rich valuation through an IPO is over, but the result could be a healthy increase in acquisitions as owners slowly come round to reality: that selling to a foreign buyer is probably the best way of cashing out.
There is no shortage of candidates, thanks to the unsustainable euphoria at the height of China's IPO boom. The number of firms listing in China, Hong Kong and New York was only around 350 at its height, yet private equity funds were investing at triple that rate. As a result, there are now more than 7,500 unexited private equity deals in China.
"IPOs may start again, but it will never be like it was," says Peter Fuhrman, chief executive of China First Capital, an investment bank that specialises in advising on private equity deals. "The Golden Age is likely over. There are 10,000 deals all hoping to be one of the few hundred to reach IPO."
As long as the window to a listing was open, China's entrepreneurs were willing to hold out in the hope of selling their business at a valuation of 80 or 100 times earnings. Even last year, when the window to IPO was firmly closed, few bosses chose to sell.
"Private equity activity was fairly muted in 2012 - you could count the meaningful exits on one hand," says Lindsay Chu, Asia-Pacific head of financial sponsors and sovereign wealth funds at HSBC. But sponsors still have a meaningful number of investments that they will need to exit to return capital to LPs [limited partners]."
However, both Fuhrman and HSBC note signs of growing interest in M&A - or at least weakening resistance to the idea.
"I'm conservatively optimistic about leveraged buyouts," says Aaron Chow, Asia Pacific head of event-driven syndicate within the leveraged and acquisition finance team at HSBC. "The market is wide open to do these deals right now, as financing conditions are supportive and IPO valuations may not provide attractive exits."
Indeed, the ability to use leverage may be decisive in helping foreign buyers emerge as the preferred exit route for China's entrepreneurs. Leverage is not an option for domestic buyers, which are also burdened with the need to wait for approvals, without any guarantee that they will get them.
This means foreign acquirers can move quicker and earn bigger returns, which may prove enticing to bosses who want to maximise their payday and get their hands on a quick cheque.
If this meeting of the minds happens, foreign buyers will get their first opportunity to buy control positions within China's private economy, which is responsible for most of the country's growth and job creation.
"The beauty here is these are good companies, rather than a troubled and bloated SoE that's just going to give you a headache," says Fuhrman. "It's still a bitch to do Chinese acquisitions - it's always going to be a bitch - but private deals are doable."
Some of those deals may involve trade sales to other financial sponsors, as a number of private equity funds have recently raised capital to deploy in Asia and are well placed to take advantage of the opportunity, despite the challenges.
"There's a lot of talk in Europe about funds having difficulty in their fund-raising efforts, but for the most part we've not seen that in Asia," says Chu. Mainland companies will attract most of the flows, he says, but there are also opportunities across the region. "China is always going to be top of the list, but Asean is becoming an even bigger focus thanks to good macro stories and stable governments. Singapore, Indonesia and Malaysia are all attractive to private equity investors."
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