Hong Kong IPO boom offers lifeline to China private equity exits
Hong Kong’s stock exchange reported its highest quarterly profit in nearly four years after China’s stimulus measures boosted trading and listing volumes.
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HONG KONG – The boom in initial public offerings in Hong Kong offers a long-awaited exit valve for private equity firms sitting on aging China portfolios, top fund managers told an industry panel on Tuesday.
After years of hush-hush deals and frozen exits, the opportunity to list at attractive valuations in Hong Kong has boosted sentiment, with companies raising $18.2 billion through IPOs as of October this year and the financial hub on track to become the world’s biggest listing destination this year.
The recovery in Hong Kong-listed stocks (the Hang Seng Index is up more than 28% so far this year, outpacing the S&P 500 with gains of less than 13%) has further boosted confidence.
Global private equity firms are cautiously bullish on China after spending the last few years on the sidelines. Cheaper valuations and hopes that domestic consumer confidence may begin to recover are drawing investors back to the world’s second-largest economy.
“In consumer investment in China, you have the opportunity to buy growth at a discount,” said Scott Chen, managing partner of global private equity firm L Catterton, noting the rapid rise of domestic brands and huge household savings.
Chen stated that he expects consumers to increasingly prefer local brands, adding: “The worst is behind us and consumer confidence is starting to change.” he added.
Nikhil Srivastava, partner and co-head of private equity at alternative investment firm PAG, echoed this sentiment, saying Chinese assets have become more attractive as many global players have withdrawn and competition has diminished.
“What this means is that you can buy market-leading assets very cheaply. These are high-quality, domestic consumption-based assets that you can buy at very attractive multiples,” Srivastava said. he added.
The shift in positioning comes after years of global distributors adopting an “anything but China” mentality, according to Tim Huang, partner at US-based Lexington Partners. “Investment sentiment has really shifted from one side to the other [when] The truth lies somewhere in the middle.”
Huang added that the opportunity in China remains attractive for investors with discipline and long-term commitment.
Is the IPO window narrow?
Returns to investors in the form of distributions of profits from portfolio companies have helped ease some investors’ concerns in the absence of outflows.
“While the exit market is a bit challenging, when you get a 15-20% return on cash assuming no growth – and if there is growth, you generate more cash – you are clearly getting paid to wait,” Srivastava said.
With corporate mergers and acquisitions still stagnant and domestic listings in China tightly regulated, Hong Kong offers a much-needed outlet. But experts warned accumulation of applications can delay plans to exit and capitalize on the momentum around Hong Kong-listed stocks.
more than that 300 IPO applications It was still in trading as of the end of October, according to the Hong Kong Stock Exchange. less than 70 pending approval in the same period last year.
Wu Qing, chairman of the China Securities Regulatory Commission, reiterated the regulator’s decision last month Promise to simplify processes Chinese firms are listing abroad, deepening the financial link between the mainland and Hong Kong.
As Hong Kong markets recover, “we believe growth will accelerate and then exit opportunities will also increase,” Srivastava said, which he said will translate into stronger returns for private equity.
