With last years going private boom among the US-listed Chinese companies in a lull we have some time to reflect on the potential aftermath.
There was quite a bit written about the going private opportunity at the time, mostly implying that the current valuations were far too low and that a de-list re-list deal taking the company from the US to Asia could yield quick returns. A promise that appears to have intrigued any number of PE firms to take a closer look at this type of deal.
The problem with this type of investment, which was also pointed out at the time, is that it usually requires another IPO exit, which at the moment is a lot easier said than done. This is creating issues for foreign PE firms currently finding out just how hard-accomplished exits are in China these days.
As was pointed out in an excellent piece on the China Private Equity blog, the domestic IPO market is tightly controlled, backed up and dominated by a few domestic firms who appear to hold the keys to the door. Also, Hong Kong is getting stricter on who they allow in, especially on VIE listings that need to provide a lot more these days, and the M&A market is still so small that it cannot be counted on to pick up much of the slack.
There are of course measures the companies can still take to increase the value of their investment, rebuilding the investment structure is one such example, but in such a stale market it will still be hard to find viable exit options.
In fact, it appears the industry has now taken some measures to try to remedy the situation itself. One such instance is the new occurrence of PE firms exiting deals to other PE firms, which begs the question of where these new owners are expecting to find an exit that their colleagues missed. We also have an interesting addition of buy-back clauses in the investment contracts that would potentially require the company to buy back the shares the PE firm took for a set yearly ROI rate.
This last measure appears particularly strange, as it does not detail where the money to buy back the shares should come from, or what enforcement mechanisms the company has at its disposal. It would seem ill advised for the PE firm to try to enforce its’ claim and make the company sell off assets etc. to pay back the investment potentially crippling a well-functioning company. The PE industry isn’t popular to begin with and such a move would certainly hurt the industry as a whole.
Overall the industry seems to be in some state of collective hibernation, with a reported $50 billion invested, and another $50 billion waiting in the wings there needs to be viable exit options available. At present you’d be hard pressed to find even one reliable exit for the industry, and even when the market starts moving in the right direction PE firms are likely to find tougher demands on what will be let through this time around.