IPO in China — Gold-plated Exit for Private Equity

Exit strategies for companies owned by private equity investors are manifold. The alternative 'going public abroad' is often left out of consideration. Against the background of the company valuations achieved in the context of IPOs on Asian stock exchanges, a reassessment seems appropriate. This article, which deals primarily with the Stock Exchange of Hong Kong ("SEHK"), is intended to stimulate a rethink.

On the day a private equity investor acquires an investment, it is clear that the duration of the investment in the company is limited. The day after the closing, in addition to the ongoing operational work in the portfolio company, the preparation of the exit begins on the basis of an exit strategy, which was usually already developed during the negotiations on the acquisition of the company. This shows that the success of an investment is not primarily determined by operating profits of the acquired company, but also by the positive exit from the investment, the sale of the company. When the company is sold, its success essentially depends on the existing market and thus on the valuation of the company.

Exit strategy

In addition to the perfect preparation of the company for the exit, the right timing is of decisive importance. The profits to be realized depend on the strategy that the private equity investor has developed for the exit. Part of this strategy is the question of which way the exit should take place: Trade Sale, i.e. the sale of the portfolio company to an institutional or strategic investor, or Initial Public Offering (IPO), the listing of the company on the stock exchange.