Alibaba delay piles pressure on private equity investors

News that Boyu Capital plans to sell its stake highlights issue of investment exits in region

PUBLISHED : Monday, 18 November, 2013, 5:25am
UPDATED : Monday, 18 November, 2013, 5:25am

The timetable for the listing of mainland e-commerce giant Alibaba is becoming increasingly important to one of its major private equity investors - Boyu Capital - which has announced it would quit its investment to take profit.

Boyu, co-founded by a handful of well-connected executives including Mary Ma and Louis Cheung, is looking to exit its holding through Alibaba's proposed multibillion-dollar initial public offering to book profits.

But a delay in the e-commerce giant's long-anticipated offering is causing a consequent delay to Boyu's own schedule of making a return to investors - and to its plans to raise fresh capital in a new fund.

Investors familiar with the matter told IPO Watch that Boyu's second fund, a US$1.5 billion investment vehicle with a similar lock-up and fee structure to its first fund, was now two months behind the original fund-raising schedule.

Boyu is not alone in struggling to secure exits from holdings.

About 10,000 deals worth a combined US$230 billion were completed on the Chinese private equity market in the past 12 years, and 7,500 of those deals remain "unexited", according to China First Capital, a mainland brokerage. This has left about US$130 billion of private equity and venture capital investment locked up in mainland companies with very few exit options available.

Unlike Japanese and Southeast Asian markets, both the Chinese and Indian markets, which offer relatively low risk and bigger upside, are known for the challenge they present to investors when it comes to exiting their holdings through an initial public offering.

So when the opportunity arises, short-term returns may make more economic sense.

For example, the return generated on private equity investments in China has averaged 10.9 per cent over the past five years, and 12.8 per cent over 10 years. Those returns have persuaded some investors to take profit, and their investment horizon is generally shorter than in other markets in the region.

Developed markets, including Singapore and South Korea, generally return about 5 per cent over a five-year horizon, and 10.4 per cent over a 10-year period, giving higher incentives for investors to stay longer.

In addition, the mounting pressure on private equity investors to realise some return comes after China's National Social Security Fund, one of the largest domestic institutional investors, said it would increase its allocation to private equity by more than 50 per cent to 30 billion yuan (HK$38.1 billion) this year.

Under the entity's charter, it can invest up to 10 per cent of its assets in private equity, according to Ernst & Young's estimate.