* PE firms selling assets to companies, despite earning less
returns than IPOs
* Pvt equity-backed M&A exits in China at $6 bln YTD, up 43
pct vs 2010
* IPO exits of pvt equity firms in China fell 20 pct last yr
By Samuel Shen and Stephen Aldred
SHANGHAI/HONG KONG, Aug 3 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
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
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)
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
"I think there's going to be industry consolidation going
forward, and companies can either consolidate or be
consolidated," said Tang.
In May, Carlyle exited another Chinese chemicals company,
Chongqing Polycomp International Corp, selling its 30 percent
stake to Polycomp's parent Yunnan Yuntianhua Co Ltd
for 1.48 billion yuan, making a four times return, according to
Lunar Capital, which has completed two majority stakes
investments in China so far this year, was recently working on
plans for three exits from its portfolio of nine companies. Of
these, two were likely to be through M&A, Derek Sulger, a
partner at the private equity fund said.
"You have good businesses with a good degree of
profitability and good transparency that are providing some sort
of core necessity, and there are increasingly going to be buyers
for those businesses," he added.
Foreign buyers will pay top dollar for good assets,
particularly if they offer a niche asset in a growth sector.
Last year, Baring exited its investment in Hsu Fu Chi when
Nestle acquired 60 percent of the snacks firm for $1.7
billion, while Bain sold stakes in Hipro Polymers and Casda
Biomaterials to leading French chemical producer Arkema, in a
deal valuing the two firms at $365 million.
Affinity and Unitas Capital sold Beijing Leader & Harvest to
French engineer Schneider Electric S.A. for $650
million. The funds had acquired the Chinese company for around
$200 million in 2009.
($1 = 6.3674 Chinese yuan)
(Editing by Denny Thomas and Muralikumar Anantharaman)