Private equity managers express exit preference via Hong Kong IPOs, conference hears

In Asia, exit values rose by a quarter in 2017 compared with the previous five-year average, to a near-record US$115 billion, with 710 exits completed

PUBLISHED : Monday, 14 May, 2018, 10:39am
UPDATED : Monday, 14 May, 2018, 11:09pm

Private equity investors have told a key industry event that while competition between the Hong Kong and Chinese stock exchanges for attracting technology-related listing candidates has intensified this year, they prefer to exit their investments through an initial public offering (IPO) on the Hong Kong bourse.

They said better liquidity, less restrictions on controlling shareholder sell downs after lock-up periods, and generally higher transparency on the Hong Kong stock exchange have combined to give more comfort to private equity investors in choosing the city to exit their investment via an IPO.

The leading investors were gathered for the “SuperReturn China” conference in Beijing.

Wanlin Liu, a managing director at the Carlyle Group, said while she saw a tendency two years ago for private-equity-backed Chinese start-ups to list on the onshore A-share market – shares trade on the two Chinese stock exchanges – more recently, she has seen more companies preferring to list on offshore markets, particularly Hong Kong.

“While the A-share market had traditionally won out (as a market for private equity exits from their Chinese portfolio companies) due to the higher multiples that A-share companies tended to trade at after their listing, recently offshore markets, especially Hong Kong, have become attractive due to their transparency and more ready access to liquidity,” Liu said.

Lock-up periods are predetermined amounts of time following an IPO when large shareholders such as company executives and investors representing considerable ownership, are restricted from selling their shares.

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Controlling shareholders are subject to lock-up requirements under both Hong Kong and China listing rules.

In the latter’s case, the regulator and the exchanges have rules to also control the pace at which, and the amount of, how such divestment is allowed and completed.

A venture capital shareholder, for example, will be able to sell down any existing shares on the stock market equivalent to less than 1 per cent of the total issued outstanding shares of the newly-listed companies.

Such divestment should also be done in a window of 1-3 month intervals each, depending on how long the venture capital fund has invested in the start-up before its IPO.

Hong Kong’s listing rules have no specific percentage cap that dictates shareholder divestment after any lock-up expiry.

Gilbert Zeng, managing director and head of China for Standard Chartered private equity, said he expects more Chinese companies to list in Hong Kong, after the exchange introduced its new dual-class share listing regime in April, which the market has welcomed, particularly for technology start-up IPOs.

In addition “due to the Shanghai and Shenzhen Stock Connects [share trading links] in place with Hong Kong, many of these companies are going to [choose to] list in Hong Kong, instead of the US for example,” he said.

Stock Connect is the mechanism through which international investors can directly trade securities listed on the two mainland bourses via the Hong Kong stock exchange. Currently there are over 3,500 A shares available via Stock Connect.

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But ultimately, the decision about whether to choose the Hong Kong or mainland bourses for a listing is also driven by the commercial considerations of the companies planning the move, Liu said, despite offshore markets being more of an historical preference by their private equity backers.

“One of our portfolio companies had still insisted on listing as an A share, as [the management] wanted a lot of individual retail investors likely to buy their stocks, to know their brand,” she said.

“It could be an advertising or marketing event for the company if their customers know that the company’s A share price is going up.”

In Asia, exit values rose by a quarter in 2017 compared with the previous five-year average, to a near-record US$115 billion, with 710 exits completed.

Around 7 per cent of that value was done through IPO, according to a Bain & Company Asia private equity report.

For mainland companies, some industry players said their preferred exit route for private equity investors remained through IPOs.