Overview

Private equity exits in Asia often adopt a dual track approach where a portfolio company prepares for an initial public offering and concurrently pursues a possible trade sale through an M&A process. For Asia-based financial sponsors, the capital markets process typically involves a U.S. or Hong Kong stock exchange, although an exit through an A-share offering on a PRC stock exchange has increasingly become a popular alternative. While IPOs remain an important exit route, the rapidly evolving global regulatory environment, macroeconomic conditions and geopolitical landscape have brought about a shift in preferred-listing destinations and investment themes. In addition, as buyers and sellers re-evaluate the risks, and private equity firms adapt to the global pandemic impact on trade sales, PE-to-PE secondary transactions have emerged as a third exit track for financial sponsors in Asia.

IPO Exits

While there were a number of high profile, U.S. IPO exits by Asia-based private equity sponsors this year, largely driven by Chinese technology and “new economy” companies (such as the multi-billion dollar offerings by Lufax and XPeng Motors), domestic Chinese IPO activity has surged due to a combination of geopolitical tensions, regulatory changes that increased the appeal of local listings and continued development of PRC capital market capabilities. In the first three quarters of this year, the Shanghai and Shenzhen stock exchanges recorded 294 new listings for a combined RMB 355.7 billion, representing a 154% increase in funds raised compared to the comparable prior-year period. Furthermore, the “Nasdaq-style” Science and Technology Innovation Board in Shanghai (the “STAR Market”) recorded 113 listings and raised a total of RMB 187.2 billion during such period, constituting approximately 53% of all funds raised in the A-share market. At the same time, the Hong Kong Stock Exchange remains an attractive listing destination, with activity driven by, among others, U.S.-listed Chinese companies pursuing “take private” transactions and secondary listings as well as private equity exits. As of September 30, 2020, seven of these secondary listings have been completed, including those of JD.com, NetEase and Yum! China, raising a total of HK$102 billion and representing approximately 48% of the funds raised during such period. Moreover, the currently suspended dual listing in Hong Kong and the STAR Market of Ant Group would have been one of the largest IPOs in history, and there are reports that ByteDance (the parent of TikTok) and DidiChuxing (the Uber of China) are similarly considering Hong Kong IPO plans.

At the same time, the Hong Kong Stock Exchange remains an attractive listing destination, with activity driven by, among others, U.S.-listed Chinese companies pursuing “take private” transactions and secondary listings as well as private equity exits. As of September 30, 2020, seven of these secondary listings have been completed, including those of JD.com, NetEase and Yum! China, raising a total of HK$102 billion and representing approximately 48% of the funds raised during such period. Moreover, the currently suspended dual listing in Hong Kong and the STAR Market of Ant Group would have been one of the largest IPOs in history, and there are reports that ByteDance (the parent of TikTok) and DidiChuxing (the Uber of China) are similarly considering Hong Kong IPO plans.

M&A Activities

M&A exit activity in Asia has slowed significantly as a result of the Covid-19 pandemic, and while cross-border transactions continued to take place, they have been conducted on a much more selective basis, often involving market leaders and high quality companies. On the other hand, deal-making in certain sectors, especially those utilizing technology to provide healthcare products and services, such as telehealth and online pharmacy, have increased in light of Covid-19.

“Going private” transactions by U.S.-listed Chinese companies have been a key driver of cross-border M&A activity in Asia, with four deals representing an aggregate transaction value of US$8.1 billion announced in the first half of 2020 (including deals involving Sina Corporation, Sogou Inc. and 58.com). With the possible adoption of legislation that would make it more difficult for Chinese companies to remain listed on a U.S. stock exchange, these going private transactions are expected to continue driving deal volume.

Finally, 2020 has been a record year for SPACs (Special Purpose Acquisition Companies), and not surprisingly there has been a significant number of SPAC mergers involving Chinese counterparties. One of the larger transactions involved Chinese co-working space operator Ucommune, which combined with Orisun Acquisition Corp. at a valuation of US$769 million after Ucommune’s failed IPO attempt in 2019.

GP-led Fund Secondaries

In light of the significantly higher market volatility and lower M&A activity level prevailing this year in Asia, PE-to-PE secondary transactions have emerged as a third track in exit processes. While there are many different ways to execute these transactions, GP-led secondaries where existing portfolio assets are transferred into a continuation fund (for more discussion on continuation funds, see Navigating the Nuances of Continuation Funds) backed by one or more new anchor LPs have gained immense traction as an additional exit route. GP-led deals typically focus only on a few or even a single asset, and allow managers to maximize value across a given pool of assets, conduct due diligence and address individual challenges of portfolio companies without the time pressure of expiring funds. Earlier this year, Beijing-headquartered Legend Capital completed a restructuring of its 2008-vintage fund, moving the remaining assets of the fund into a US$200 million continuation vehicle backed by Hamilton Lane for a period of five years. TR Capital also backed a renminbi-to-U.S. dollar restructuring involving seven assets with a net asset value of approximately US$100 million managed by Beijing-headquartered Kinzon Capital, with follow-on capital for new investments. The transaction allowed Kinzon’s fund to return a significant portion of capital to existing LPs, particularly domestic LPs who wished to see distributions from their capital commitments. In September of this year, IDG Capital completed a US$600 million Renminbi fund restructuring in which the remaining assets in a mature yuan-denominated fund were transferred into a U.S. dollar-denominated vehicle backed by a consortium of secondary investors led by HarbourVest Partners. The Asian GP-led market looks set to continue growing as GPs seek additional avenues to exit investments and return value to their LPs.

The Private Equity Report Fall 2020, Vol 20, No 3