IPO weakness drives shift by PE investors

As it becomes tougher to exit their investments through IPOs, Chinese private-equity (PE) participants are prioritizing performance improvement and seeking other exit strategies such as secondary buyouts and strategic purchases, according to a report released on Thursday.

Grant Thornton International, a leading accounting and consulting organization, interviewed 144 top PE professionals around the world.

The report said that nearly 44 percent of the respondents now view performance improvement as the main way to drive value, with just 2 percent citing financial engineering as a value driver.

"As the market develops, people will have to think harder about their strategy. In the past, they did well in multiple arbitrage between the public and private markets, but things have changed," the report quoted a Chinese survey respondent as saying.

Grant Thornton China Partner Liu Dongdong, one of the authors of the report, said that PE firms cannot rely on arbitrage in the current environment.

"In China, building value comes down to earnings growth. They need to demonstrate that they have delivered tangible improvements to the business, such as improvements to the performance and strengthening of the management team," said Liu.

The report said that while public market sentiment is perceived to be working in favor of PE in markets such as Brazil and India, that's less likely to be true on the Chinese mainland.

"Among the latest four Chinese companies seeking IPOs, three failed," Liu said. That outcome "signals the exit channel of an IPO has become more difficult".

According to China Venture Group, a leading domestic PE research agency, 214 Chinese companies listed domestically and overseas in the first half, of which 100 had capital injections from PE or venture capital (VC) firms.

But in the third quarter, the number of newly listed companies with a PE or VC background decreased to 43.

The report also said that while PE managers in the BRICS countries (Brazil, Russia, India, China and South Africa) have seen an increase in exit activity, many on the Chinese mainland expect to see falling realizations.

Globally, IPO exits stand at a mere 14 percent as opposed to 37 percent in BRICS economies, but the option of a secondary buyout in BRICS economies (20 percent) is less common than in global economies (32 percent).

Trade sales are the most prevalent method of exit for both BRICS (43 percent) and global economies (53 percent), the report found.