Home' A Plus Magazine : July 2013 Contents 16 July 2013
companies and reform the IPO approval and pro-
cess,” says Andy Wong, an assurance and busi-
ness advisory ser vices partner at ShineWing and
a Hong Kong Institute of CPAs member. “Without
such measures, the market will consider the current
To be sure, regulators have been cracking down
on the architects of badly designed IPOs launched in
recent years. In May, the CSRC fined Ping An Securities
for inadequate due diligence in the 2011 IPO of Wanfu
Biotechnology Hunan Agricultural Development Co. The
Shenzhen Stock Exchange publicly censured Wanfu for
artificially inflating earnings and profits and said further
violations could result in its delisting.
The CSRC’s proposed new regulations are also likely to
help (See “Getting to grips with ailing IPOs” on page 18). “I
think these measures will restore confidence to investors
and provide an opportunity for the market to rest before
relaunching so it can better face future challenges,” says
Edward Au, head of the national public offering group at
Deloitte Touche Tohmatsu in Hong Kong.
Private equity pain
A return of the IPO market would not only supply capital
to China’s cash-star ved companies, it could end a headache
for Mainland private equity and venture capital companies.
Of the 800-plus IPO candidates stuck in the pipeline in
October 2012, more than 40 percent were backed by private
equity firms, according to a report by China Venture Invest-
ment Consulting in Shanghai in April.
Private equity firms rely on IPOs as their primary way
to exit from investments in China. “ When the IPOs stopped,
most private equity firms stopped investing,” notes Peter
Fuhrman, chairman and chief executive officer of China
First Capital, a Shenzhen-based investment fund.
Fuhrman says private equity investors have US$40 bil-
lion worth of investment locked up without being able to
exit via IPOs. “ That money is now idle and not going to
help good companies become better,” he says.
Paul Lau, capital markets partner at KPMG China and
an Institute member, says companies are struggling to
find funding sources. “One way is to raise [alternative] fi-
nancing from within China, but the cost of that is pretty high
and the terms tend to be short,” he says.
Wong says some companies – only those enterprises with
good credit quality and promising operating future – might con-
sider the issue of bonds. Others have turned to refinancing or
funds from non-formal financing sources at higher costs.
Lau, meanwhile, agrees that many private equity inves-
tors’ exit strategies have been restricted by the IPO freeze,
but points out that they have other ways to exit, such as
through a Hong Kong listing, selling their holdings to anoth-
er private equity investor or trying to unload their invest-
ment back to the founders.
Ho at EY says that private equity investors are now more
likely to focus on pursuing non-IPO exits. “IPO has been the
predominant [exit route] because private equity investments
in Chinese companies have mostly been limited to minority,
non-controlling equity stakes,” he explains.
China’s private equity industry is urging authori-
ties to take regulatory steps that could boost the Mainland’s
mergers and acquisitions activity. Fuhrman at First Capital
says M&A could “help ease some of the pain caused to
private equity companies by the block in IPOs.”
Fuhrman says officials have been receptive to re-
quests to encourage M&A. “ The exit crisis in China’s pri-
vate equity industry [is] driving a change in the direc-
tion of M&A in China,” he says. “Policies and regulatory
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