Hong Kong: The near-shutdown in the market for initial public offerings (IPOs) this year will generate opportunities for funds investing in early-stage companies, a veteran Asia investor said Tuesday, as companies seek alternative sources of capital.
While it takes time for unlisted firms to rein in valuation expectations after the long bull run, Baring Private Equity Partners chief executive Jean Eric Salata said the climate for making attractive growth capital investments is ripening as competition wanes.
Bottom-fishing: Baring Private Equity chief executive Jean Eric Salata says private firms still need to come to grips with reduced valuations with the public issue route closed off.
“The IPO markets are dormant right now, so taking companies public is challenging, but for us that’s really a pretty big opportunity,” said Salata, whose firm manages around $2.5 billion (Rs10,125 crore) and focuses on taking stakes in early-stage firms.
Salata’s last fund, Baring Asia Private Equity Fund III, closed in August 2006 and raised $490 million. It has generated an annual internal rate of return “in the triple digits”—100% or more, Salata said, not giving details.
Baring, which raised eyebrows for selling a $404 million stake in a listed coal miner last year before its lock-up period had lapsed, has focused heavily on China but is broadening its horizons and has made recent investments in India and Japan.
Besides energy, Baring Asia is focused on media in China, education and medical devices—a sector Salata said had been late to embrace outsourcing to China.
On Monday, Baring Asia announced a $88 million investment in a Chinese producer of coalbed methane by its new fund, which is still in the process of raising money. Salata declined to comment on the new fund.
Globally, about 65 companies have withdrawn or postponed IPOs this year worth nearly $23 billion, according to Thomson Financial, with those pushing ahead in the public capital markets forced to price their deals more modestly.
One company that scaled back its IPO hopes is Chinese solar wafer maker Solargiga Energy Holdings Ltd, which relaunched a deal on Tuesday to raise $127 million in Hong Kong—less than half its original fund-raising target in January. “Normally in the last 6-12 months, one of the biggest sources of competition for us were the public markets, because why would companies want to sell to private equity investors at a lower price when they can get a much higher price from the market,” said Salata. “That alternative, that form of competition is gone.”
Salata said private companies still needed to come to grips with reduced valuations with the IPO route closed.
“The problem is that private markets usually take a lot longer to respond to changes in market valuations than the public markets do, so the expectations of sellers usually lag what’s happening in the public markets,” Salata, who has been based in Hong Kong since 1989, said in a phone interview.
“We are starting to see some signs of that, although I’d say it’s still a little early. It hasn’t gone on long enough, it hasn’t gotten bad enough,” he added.
In October, Baring Asia drew scorn from some market players when it sold an 11% stake in Chinese coking coal producer Hidili Industry, one of the year’s hottest IPOs, before its lockup agreement had lapsed.
Salata said on Tuesday that the decision was the right one for Baring, Hidili and its shareholders. “We’ve removed a big overhang that existed by having a big PE (private equity) firm with a big block of stock,” he said. “We did it at a time when it created the least amount of disruption by doing it when volumes were very, very strong.”
Shares in Hidili have fallen about 18% below Baring’s sale price, compared with the 34% drop in the index of mainland Chinese companies listed in Hong Kong.
“We think it was the right decision both for the company, for the shareholders and for ourselves,” he said.