A-share Market Faces Policy Shift VC/PE Institutions Seek for Diversified Channels of Exit
As the capital market reform gradually deepens, China’s securities market still faces a chain of problems such as insufficient market-orientated development and “high P/E ratio, issue price and oversubscription” in ChiNext and SMEB. During his tenure of office, Shang Fulin, former Chairman of the CSRC, successfully completed the split share reform, and initiated a new round of reform on new stock issuance system in 2009; after the personnel change upon the completion of the former term of office, the securities market reform dominated by the CSRC kept speeding up, with various measures devised successively. Amid the dual challenges, i.e. tightening IPO review at home and sluggish capital market abroad, domestic VC/PE institutions have seen a trend of increasingly shrinking ROI through IPO exits, which poses a threat to their development.
The regulator implements tough regulation; new policies are frequently introduced for the market-orientated reform
To further improve domestic securities market, the CSRC has rolled out several measures after the personnel change upon the completion of the former term of office. In November 2011, it launched a new dividend policy which demands clear definition of respective dividend plans by listed companies, while announcing that it will beef up effort to prevent, control and crack down on insider trading and address the problem in an all-round way; at the end of November, the draft for ChiNext delisting system was unveiled; the highly expected expansion of agency share transfer system will become part of the history, as the CSRC Chairman Guo Shuqing pointed out that “the construction of an OTC market under unified regulation shall be accelerated based on OTC transactions” at the national work conference on securities and futures regulation for 2012; a new move was introduced for the new stock issuance reform on February 1, as the CSRC released the Circular on Adjusting the Pre-disclosure Time & Other Issues, which advances the time for an enterprise to be listed to pre-disclose its prospectus to the moment before the preliminary review conference from fives days ahead of the issuance review conference; the CSRC Chairman Guo Shuqing recently has put forward the “possibility of IPO without review”, which thrusts the securities issuance review system into the center of a public debate.
According to Zero2IPO Research Center, the successively launched moves, on one hand, reflect the regulator’s idea for the reform, i.e. tightening regulation, loosening administration and establishing an honest, open and transparent market, on the other hand, demonstrate the regulator’s resolve to unswervingly push forward the market-orientated reform. Only by introducing market mechanisms, renovating the new stock issuance system under the administrative review, shrinking the room for rent seeking and strictly executing the delisting system can China promote the survival of the fittest, solve the problem of “high P/E ratio, issue price and oversubscription”, draw long-term funds into the market, coordinate the development of both primary and secondary markets and ultimately safeguard the interests of investors. Although the market-orientated reform is unlikely to be completed in one step, but it cannot step backward and construction of a diversified and multi-layered capital market is imperative.
Investment returns keep falling; VC/PE institutions meet challenges in exit
Successful exit for cash is fundamental for investment institutions to make profit, and among the major exit channels of VC/PE institutions is IPO before 2011. But dampened by global economic downturn and tightening IPO review by the CSRC, VC/PE institutions have found it is hard to exit through IPOs both at home and abroad since 2011. Data of Zero2IPO Research Center show that 2011 saw drops in both domestic and overseas IPO quantities and declines in both the number and financing amount of VC/PE-backed listings by Chinese enterprises both at home and abroad. In 2010, the average book ROI at home was 9.27 times, compared with 7.78 times in 2011 after the super-high ROI of Sinovel was deducted; the average book ROI of domestic ChiNext and SMEB also fell from 10.90 times in 2010 to 7.81 times and 9.18 times in 2011 respectively.
Moreover, 2011 saw the exits of 235 PE funds from invested enterprises; Of the 150 exit deals, there were 135 achieved through IPOs, seven through M&As, five through trade sales, one through MBO and two through other means. With regard to the exit deals in the VC/PE industry, both domestic and foreign VC/PE institutions were involved in 456 exit deals in 2011, including 312 deals realized through IPOs (68.4%), 55 through the increasingly rising M&As (12.1%), 41 through trade sales (9.0%) and 22 through MBO (4.8%). With advantages in either convenience or ROI, M&A is expected to render higher ROI as a means of exit.
According to Zero2IPO Research Center, investment institutions are facing gradually shrinking profit when they choose to exit through IPOs with the advance of the new stock issuance reform in the securities market. Furthermore, as the industrial competition grows increasingly intense, VC/PE institutions are bound to gain lower ROI in IPO exits in 2012, and seeking for other ways of exit for fresh opportunities has become a pressing priority.
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