For China's Private Equity, A Long And Painful Path To Liquidity

May 8 2014, 5:22am CDT | by

A festive ring of the bell and a salvo of red and blue confetti mark the making of a newly minted public company, otherwise known as an IPO. An elaborate dinner party with free-flowing champagne and cocktails usually ensues that same night.

If you are a private equity investor who has invested in the company years before, the day is certainly worthy of celebration. You are now positioned to exchange the company’s shares – now publicly traded on a stock exchange – for cash, in what the industry calls an “IPO exit.”

But, your luck would be drastically different if the IPO had been in Shanghai or Shenzhen, the two stock exchanges located in Mainland China. Not only because they have been among the worst performing markets in the world, but also because IPO exits in Mainland China present unique challenges that are unlike any other markets.

Morgan Stanley Private Equity Asia Gets Locked Up

On May 4, 2011, Chinese polyester filaments yarn maker Tongkun Group Co. Ltd., a company backed by Morgan Stanley Private Equity Asia (MSPEA), completed a US$503 million IPO on the Shanghai stock exchange. The IPO was priced at RMB27 per share, and the stock rose 10% to RMB29.71 on its debut.

A year earlier on March 15, 2010, MSPEA paid RMB4.9 per share to acquire 41.8 million shares of Tongkun, or 8.68% of the company, in a pre-IPO deal. On the day of the IPO, the American investment bank’s Asian private equity arm recorded a paper profit of close to RMB1 billion (US$624 million).

That would have been a great payday. But what happened afterward was nothing that the private equity investor had in mind.

The polyester filaments yarn sector, which provides material for clothing and industrial products such as tires and conveyor belts, was hammered by overcapacity and a hard-hit export economy in China. The price of polyester FDY 75D/36F, a type of twisted sewing thread, plummeted 42% to RMB10,100 per ton in March 2014 from RMB17,300 in March 2011.

Tongkun Group, as the largest polyester filaments manufacturer in China, saw its share price slide to RMB12 per share in March 2012, and then to RMB5.68 in early May. The sentiment toward the sector was so negative that for the previous twelve months, the company’s stock has been trading below its net asset value, which stood just under RMB7 per share.

By the time MSPEA’s three-year lock-up period since the day of its original investment on March 15, 2010, expired, Tongkun’s share price had plummeted 73% to RMB7.29.

If MSPEA were to sell its shares today, its profit would be a meager RMB32.6 million on an original investment of RMB204.8 million during a five-year period. That implies an internal rate of return of around 3.69%, before fees and other costs. That is certainly not the type of return investors expect from an emerging market like China./>/>

As of March 31, 2014, MSPEA still holds 8.68% of Tongkun Group. The Chinese polyester filaments yarn sector continues to be burdened by overcapacity. As China’s economy slows and restructures away from its export-led growth model, the sector’s outlook remains gloomy.

To continue reading, click here.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Mali confirms two new Ebola cases
United Nations, Nov 26 (IANS) Mali has confirmed two new cases of Ebola, bringing to total number of cases in the West African nation to eight, days ahead of the opening of a new UN Ebola response office.
 
 
Merkel warns of recession in Europe
Berlin, Nov 26 (IANS) German Chancellor Angela Merkel Tuesday warned that Europe could slide back into recession, media reported.
 
 
India, Nepal ink nine deals; Modi inaugurates trauma centre, bus service (Roundup)
Kathmandu, Nov 25 (IANS) Nepal's happiness "gives us joy", Prime Minister Narendra Modi said here Tuesday on his second visit to the Himalayan country in 100 days as both sides inked nine agreements, further cementing their close ties.
 
 
India, Nepal ink 10 deals; Modi inaugurates trauma centre, bus service (Intro Roundup)
Kathmandu, Nov 25 (IANS) Nepal's happiness "gives us joy", Prime Minister Narendra Modi said here Tuesday on his second visit to the Himalayan country in 100 days as both sides inked 10 agreements, including on $1 billion assistance to Nepal.
 
 
 

Latest from the Network

Mali confirms two new Ebola cases
United Nations, Nov 26 (IANS) Mali has confirmed two new cases of Ebola, bringing to total number of cases in the West African nation to eight, days ahead of the opening of a new UN Ebola response office. The UN...
Read more on Business Balla
 
Paris Hilton hugs cubs of big cats
Mexico, Nov 26 (IANS) Socialite Paris Hilton, who loves animals, was spotted cuddling lion and tiger cubs on her visit to a big cat sanctuary here. The 33-year-old couldn't resist sharing several videos and...
Read more on Celebrity Balla
 
Don't Miss these Black Friday Deals and Sales
Black Friday 2014 will end in 4 days. The biggest release of deals is still to come, but there are already many Black Friday 2014 Sales underway. Thanksgiving Day mark will be the big launch day for online and in-store...
Read more on Black Friday Countdown
 
Taylor Swift cautious of fake friends
Taylor Swift has no time for fake friends. The 'Shake It Off' hitmaker says she's not interested in being friends with people who are only keen on spending time with her because she's rich and famous. She explained: ''...
Read more on Celebrity Balla
 
Cyber Monday Deals better than Black Friday Deals?
Black Friday 2014 Sales are underway. We count over 12 Black Friday 2014 sales that either have fully launched or offer a selection of the advertised Black Friday deals. Each year there is discussion about if Black...
Read more on Black Friday Countdown
 
Shia LaBeouf abides by plea deal
Shia LaBeouf is abiding by the plea deal he reached with Manhattan prosecutors after his drunken meltdown in June. The 'Fury' actor appeared in Manhattan Criminal Court earlier today (25.11.14) to submit proof he's been...
Read more on Celebrity Balla
 
The Best Laptop Deal in Black Friday 2014
Black Friday 2014 is here and the first Black Friday 2014 Sales are already underway. The full push of Black Friday 2014 deals happens on Thanksgiving Day. So there is still a little time to make your shopping lists. If...
Read more on Black Friday Countdown
 
Cheryl Fernandez-Versini blasts Simon Cowell over weight comments
Cheryl Fernandez-Versini has blasted Simon Cowell for commenting on her weight. The 31-year-old beauty said it was ungentlemanly for a man in his 50s to suggest she'd gained weight prior to her brief appearance on the...
Read more on Celebrity Balla
 
Nick Cannon denies links to Amber Rose
Nick Cannon has denied having any romance with Amber Rose. The 34-year-old entertainer recently separated from Mariah Carey, whom he married in 2008, and has since been romantically linked to Amber Rose, 31, who filed...
Read more on Celebrity Balla
 
The Best TV Deals on Black Friday
Black Friday is one of the best times to buy TVs. It is the best time to get your hands on bargain TV deals like a $79 32-inch TV or a $119 40-inch TV. You see such deals never during the year. You also do not see such...
Read more on TV Balla