PE Firms Seek Exits Through China M&A

When U.S. private equity firm Carlyle Group sold its stake in a Chinese chemicals maker to a rival producer last week, the deal underscored how funds are increasingly moving away from their traditional exit route of listing mainland assets in stock markets.

Historically, IPOs had been the dominant exit strategy for buyout funds investing in China, where a booming market for new issues previously enabled funds in some cases to gain more than 30 times the amount invested.

But with slowing capital markets making it tough to launch IPOs, and new regulations making it easier for foreign industrial and consumer companies to buy into their Chinese counterparts, private equity is accelerating the use of a generally less lucrative approach.

Year-to-date private equity backed M&A exits in China have already reached $6 billion, their highest level in five years and 43 percent higher than the same period for the previous record year, 2010, Thomson Reuters data shows.

“When exits through IPOs become so difficult, private equity investors would naturally be under pressure to seek alternative exit channels, such as through trade sales,” said Poddy Feng, analyst at ChinaVenture, a Beijing-based private equity consultancy group.

Carlyle last week struck its second deal with an industrial company in China in less than three months, setting the U.S. buyout fund on course for a 1 billion yuan ($157.1 million) profit.

It agreed to sell its 40 percent stake in Jiangsu Sinorgchem Technology Co Ltd to Sinochem International Corp for about 1.9 billion yuan, according to Reuters calculations. Carlyle had bought the stake for 947 million yuan in 2008, according to Shanghai Securities News.

Private equity executives see the M&A exit trend gaining momentum, with Affinity Equity Partners, Bain Capital, Baring Private Equity Asia and Unitas Capital all taking M&A exits on recent China deals.

China’s IPO juggernaut has come to a virtual halt, after the benchmark stock index tumbled 22 percent last year, while overseas listings have been hampered by negative sentiment towards Chinese firms due to a series of accounting scandals.

Last year, IPO exits by private equity firms in China fell nearly 20 percent to 171, according to consultancy Zero2IPO. Average IPO returns on investments also slid to 4.48 times in the first quarter of 2012, from 33 times a year earlier.

A key driver for companies to strike deals is the need to consolidate China’s fragmented industries, where top players often take less than five to 10 percent market share, according to Frank Tang, managing partner at private equity fund Fountainvest Partners.

“I think there’s going to be industry consolidation going forward, and companies can either consolidate or be consolidated,” said Tang.

(Samuel Shen and Stephen Aldred are reporters for Reuters news service.)