VC/PE IPO hindered, M&A exits increase, diversified exit channels

　　Over the past year, with the continued sluggishness of the global economic environment and the weak performance of the capital market, the number of Chinese companies listed on domestic and overseas capital markets has sharply decreased. The number of risk investment/private equity investment (VC/PE) exits through initial public offerings (IPOs) has also declined, and the return on investment has gradually decreased, making diversified exit channels an important consideration for VC/PEs.
　　Meanwhile, the transaction volume of the Chinese M&A market has shown a rapid growth trend, with the number of M&A cases and the amount of M&A increasing exponentially. M&A supported by VC/PE is also increasing rapidly. Analysts say that with the downturn in the global IPO market, as M&A transactions become increasingly active, the proportion of VC/PE exits through M&A is expected to increase significantly in the future.
　　VC/PE IPO Exits Obstructed
　According to data, in 2011, Chinese companies completed a total of 356 IPOs in domestic and overseas markets, with a total financing amount of US$61.532 billion. Compared with 2010, the number of Chinese companies listed decreased by 120, and the financing amount decreased by 41.6%.
　　“Due to the generally weak economic situation in Western developed countries, coupled with the adverse effects of the European debt crisis, the US debt crisis, the turmoil of Chinese concept stocks, and the VIE regulatory dilemma, the number and financing amount of Chinese companies listed on overseas capital markets have both declined significantly,” said a relevant analyst.
　　In 2011, a series of rumors about the tightening of VIE regulatory policies caused panic in domestic and overseas capital markets, and the credibility of overseas-listed Chinese concept stocks was also questioned. Chinese concept stocks suffered setbacks in the US market, with both volume and price falling. Several well-known internet companies postponed their plans to go public in the US. In the second half of the year, only Tudou.com was listed in the US in August. Overall, only 75 Chinese companies were listed on 13 overseas capital markets in 2011, raising US$17.813 billion, accounting for 58.1% and 53.5% of the number and financing amount of Chinese companies listed overseas in 2010, respectively.
　　Compared with the ups and downs of the international economic trend, China's economic development in 2011 was relatively stable. However, due to the continuous decline in the Shanghai and Shenzhen stock markets, the scale of IPOs of Chinese companies in the domestic capital market was also affected. The 281 companies listed on the three domestic capital markets raised US$43.719 billion, with an average of US$156 million per company. The number of listed companies decreased by 66 compared with 2010, and the financing scale decreased by 39.3%.
　　Against the backdrop of the shrinking scale of IPOs of Chinese companies, VC/PE exits have also been affected. According to statistics, in 2011, a total of 170 VC/PE-backed Chinese companies were listed on domestic and overseas capital markets, completing 171 IPOs, a decrease of 50 compared with 2010. A total of US$29.542 billion was raised, a decrease of 25.2%. The overseas market was particularly affected, with only 29 VC/PE-backed Chinese companies achieving IPOs, raising US$6.142 billion, a significant decline compared with 2010.
　　Meanwhile, excluding the impact of the extremely high book return case of Hua Rui Wind Power, the average book return of VC/PE exits through IPOs of supported companies in domestic and overseas capital markets in 2011 was only 7.78 times, far lower than the average book return on investment of 9.27 times in 2010.
　　Analysts predict that the situation of Chinese companies going public overseas is expected to improve in 2012. The regulatory authorities in the domestic market may maintain a tightening stance on IPOs, but will moderately adjust the issuance speed. The number and financing amount of company IPOs will remain at a relatively stable level, but the price-to-earnings ratio will remain low. Overall, the profit margin of VC/PE exits through IPOs is narrowing, and with the increasing competition among investment institutions, the investment prices of some projects have increased. The return on investment of VC/PE exits through IPOs will continue to decline in 2012.
　　Significant Increase in VC/PE Related M&A Transactions
　　In contrast to the sluggish IPO market, the Chinese M&A market experienced explosive growth in 2011, with both M&A activity and M&A value reaching a six-year high. Data shows that in 2011, the Chinese M&A market completed 1,157 M&A transactions, with a total value of US$66.918 billion for 985 transactions with disclosed prices, representing an increase of 86% and 92.3% respectively compared with 2010.
　　“The rapid growth of the Chinese M&A market in 2011 benefited from the good development of the Chinese economy and was also supported by national policies on mergers and acquisitions and restructuring. In addition, under the gloomy global economic environment, Chinese companies seized opportunities to achieve new successes in cross-border M&A, with a particularly significant increase in overseas M&A transactions by Chinese companies in cross-border M&A.”
　　Driven by the overall growth of the M&A market, VC/PE-related M&A transactions also increased exponentially. Data shows that in 2011, VC/PE-backed Chinese companies completed 194 M&A transactions, a year-on-year increase of 113.2%. The total value of 176 M&A transactions with disclosed prices reached US$11.968 billion, with biotechnology/healthcare being the most active sector for VC/PE-related M&A transactions.
　　Xu Weiqing predicts that the downward pressure on the global economy will increase in 2012, and China's economic growth rate will also decline slightly. The sluggish global economic environment will affect investors' confidence, limiting the growth of the global M&A market. However, China's continued pursuit of the goal of “adjusting the structure”, the implementation of a series of industrial plans, and the realization of industrial integration, transfer, and upgrading have injected impetus into the domestic M&A market. At the same time, the introduction of new M&A policies by the state on foreign M&A, major asset restructuring, etc., will play a good regulatory and guiding role in the market. Therefore, the explosive growth of the Chinese M&A market will continue, and the number and amount of M&A cases are expected to break records again.
　　Increased Proportion of VC/PE M&A Exits
　　Currently, seeking diversified exit methods and increasing the proportion of M&A exits has become a hot topic of discussion in the industry. At a discussion held at the end of 2011, Zhao Hui, partner of Shenzhen Oriental Fortune Sea Investment Management Co., Ltd., said that the development and growth of enterprises objectively require a process of mergers and acquisitions and integration. Enterprises that have reached a certain scale, especially those that have already occupied a leading position in the industry and some listed companies, should have a strong willingness to achieve their own development through mergers and acquisitions. It is believed that the M&A market will provide better opportunities for VC/PE exits in the future.
　　Some industry insiders said that the current returns from VC/PE exits through M&A are still quite considerable, with a minimum of more than 2 times and a high of 7-8 times. In addition, many listed companies currently engaged in businesses belong to niche industry sectors, some of which are industry “leaders”. These leading companies in niche sectors will drive the rise of the Chinese M&A market in the future. M&A exits will have great potential in 2012 and beyond.
　　Industry insiders said that IPOs have always been the main exit method for PEs, and the return on investment is also generally high. However, with the increasing resistance to IPO exits and the decline in the return on investment, the concept of “IPOs first” in China's PE market will change in 2012. PE fund management institutions whose projects are nearing the exit period need to consider and weigh whether to wait for an appropriate time to go public, hoping to obtain a higher book return on investment after the company goes public, or to consider the time cost and choose to “take the profit and run”, exiting early through other means to ensure a good internal rate of return.
　　“From the data in 2011, a total of 7 M&A exit cases occurred in the Chinese PE market, a 250% increase compared with 2010. It is believed that the number of such exit cases will continue to increase significantly in 2012, and more PE funds will choose to exit through M&A and other methods. PE exit methods will also develop in a diversified direction,” said Fu Jiji.
　　Xu Weiqing also stated, "During the '12th Five-Year Plan' period, against the backdrop of transforming the economic development model and under the guidance of relevant national policies, various industries will aggregate advantageous productivity through mergers and acquisitions, and multiple industries in China will usher in a peak of M&A. In this wave of integration, leading enterprises and listed companies with advantages in scale, resources, and technology will be the first to benefit." This provides a good opportunity for VC/PE to exit through M&A.