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Positive knock-on effect for PE through China lifting IPO ban

By Paul Mackintosh - 24/02/14

Private equity advisory and fund of funds firm Altius Associates has just released its annual private equity survey, with some interesting findings and one glaring question mark – but more of that later. First, the broad conclusions of the report from this fairly well-regarded manager of around US$24 billion in assets.

For one thing, “In emerging markets, Altius highlights that while investors have been increasing their allocations over the last ten years, exits still lag far behind and this is reflected in a significantly lower distributions to paid-in (DPI) ratio than the US and Europe”. Altius attributes this to a tendency in emerging markets towards growth capital investments, “which generally take longer to create value than buyouts”. Elvire Perrin, investment partner at Altius, remarks: “While the pace of fundraising and investments has picked up over the past decade, especially in Asia, exits still lag far behind. In Asia, for example, the Centre for Asia Private Equity Research (APER) estimates a realisation rate on capital deployed of less than 25% since 2007. If we look at the broader emerging markets data over the last ten years, the picture is the same.”

Altius recommends going for a diverse selection of supporting strategies ensuring early liquidity to complement an underlying growth strategy, “including direct secondary funds – funds using structured equity to invest (mezzanine or preferred equity), or distressed and other type of credit funds”. That said, Altius also states that it “has seen a select group of Asian private equity managers distribute more capital in 2013”. These are the managers that it recommends pursuing, with others far less likely to deliver the goods for limited partners (LPs), and very sharp demarcation between those who can deliver the returns, and those who cannot.

And the glaring question mark? Well, that conclusion about emerging markets and the pace of realisation. Altius clearly references China at the head of its emerging markets bucket, but without mentioning the freeze on PRC IPOs, in place since end 3Q 2012 and only just lifted in January this year. Private equity in China has long had a heavy slant towards listing exits, and the IPO freeze has naturally curtailed these. Considering the great contribution that China makes to emerging market private equity in general, one wonders just how much of that lag in realisations is down to this particular China syndrome. With the lifting of the IPO ban in January, those realisation figures might start to improve – but there's quite a backlog of listings candidates to work through first.