Private equity firms prepare to put assets on the market

With the mainland's listing market having been closed for business for the past 11 months, private equity firms are clamouring to sell maturing assets locked up in their portfolios and return some profits to their impatient investors.

As a result of the suspension on initial public offerings on the mainland, many private equity firms have seen internal rates of return plummet from more than 30 per cent to single digits, putting them under pressure to improve their performance for their investors.

In theory, taking an alternative approach of making trade sales may seem to be an economically viable solution to their predicament, but the reality is that many dealmakers are reluctant to share their secrets to boosting the efficiency of the companies in their investment portfolios before taking them public.

Speaking at an industry forum last week, Fred Hu Zuliu, the chairman of China-focused private equity firm Primavera Capital and a former Goldman Sachs partner, flagged the reopening of the mainland listing market, which has been shut since November last year.

The remarks offered a fresh sign of hope for venture capitalists and private equity firms that have invested in 6,000 pre-float deals in the past five years, rekindling their desire to exit through the listing market on the mainland.

Even after the remarks by Hu - a close adviser to Beijing - it remains unclear exactly when the China Securities Regulatory Commission, the industry watchdog, will allow new stock listings to resume.

But the relaunch of the market is nonetheless expected in the very near term, an expectation that has been reinforced by recent media reports from the mainland that regulators were ready to announce a detailed plan to reform stock offer procedures.

There has been speculation that the initial public offering market could restart either before or after the October 1 National Day holiday.

The mainland market, which includes the Shanghai and Shenzhen stock exchanges, has been the single most important exit point for private equity investors for the past two decades, although stock exchange operators in Hong Kong and the United States have steadily increased their scrutiny of mainland Chinese listing hopefuls amid a slew of falsified financial figures and misleading statements.

Mainland private equity firms, which normally take money from institutional and super-wealthy clients who are willing to agree to lock-up periods of 10 years, invest in risky private start-ups and require an annual return of at least 15 per cent.

The prolonged suspension on new listings was designed to crack down on insider trading and boost investor confidence. But the pause also gave dealmakers the time to pay their bills and rethink their strategies.