Chinese PE Funds Eye Local Take-Privates

SHANGHAI (Reuters) – China-focused private capital funds, once eager to help Chinese companies go public, are now more interested in listed firms which have the potential to be privatised at a low cost, dealmakers said on Tuesday.

Public listings on international stock markets and trade sales of private capital-backed companies used to be two of the most popular options used by private equity and venture capital funds to exit their investments.

However, the global investment landscape has changed greatly in the past year due to the financial crisis as many companies had to delay or cancel their plans for initial public offerings.

To some Chinese entrepreneurs whose companies went public in early 2008 before IPOs completely dried up, listings were not a happy experience either as the share prices of such firms have mostly fallen below their IPO levels.

“Some entrepreneurs are now planning to privatise their listed companies as they don’t have the heart to see continuous falls in share prices below a reasonable level they can accept,” said Sequoia Capital’s founding China partner Neil Shen.

Shirley Chen, a managing director of China International Capital Corp (CICC), said her firm has been looking at several small- and mid-sized listed companies with potential for privatisation this year.

She did not name any companies but noted it could be a good opportunity now to work with entrepreneurs to delist their companies from second-board markets such as the Alternative Investment Market of the London Stock Exchange.

“Second-board markets in London or Singapore are too small for some Chinese companies. After IPOs in these markets, it will be really difficult for these firms to raise additional funds from these markets particularly in bad times,” said Chen, who is also the head of private equity at CICC.

Chen noted privatisation of listed companies would cost less now due to cheaper share prices, and trade sales when companies grow bigger can be an exit option for funds.

CICC is China’s first investment banking joint venture, in which Morgan Stanley (MS.N) holds a 34.3 percent stake.

WHEN TO INVEST?

“Share prices of some listed companies fell very sharply in the past year, so we should be happy to make investments now from the perspective of private equity funds,” Chen said.

“One goal is to help these firms to delist and we can offer loans to entrepreneurs to buy back shares or we can work with them together to buy out their companies,” she added.

Even after gaining 20 percent this year, the benchmark Shanghai Composite index .SSEC is down 64 from its October 2007 peak.

Jing Huang, managing director of Bain Capital, also said privatisation of listed Chinese firms provided a good investment opportunity. However, he warned many Chinese entrepreneurs disliked private equity investors interfering with their management and business.

Speaking at an industry forum on Tuesday, Sequoia’s Shen and CICC’s Chen said late this year or early next year may be the best time to start to make China deals when valuations settle down.

But they also said they would not invest in companies whose prices look “too cheap to be true”.

“I always believe if a company offers you a price that is incredibly low, for instance, some companies that ask for price-earnings ratio of 4 times or even 3 times, there must be a reason behind that you probably don’t know,” said CICC’s Chen.

“We are still in the financial crisis so we must be extremely cautious,” she added.

By George Chen
(Editing by Lincoln Feast)