Bain: China’s new IPO regulations could bolster secondaries market

The country's official cabinet has published a nine-point circular to ‘strengthen supervision’ on capital markets, including updates on listing process and delisting regulations.

China’s secondaries market may have another booster: state intervention.

The State Council of the People’s Republic of China, the official cabinet of the country, issued a circular this month listing nine areas of focuses for heightened supervision in the public market. These include higher standards of requirement when making public offerings and improved delisting mechanisms for unqualified companies.

While the market awaits further clarity over IPO regulations, secondaries players might be the ones to gain. According to Bain & Co’s Greater China Private Equity Report 2024, as IPO exits remain constrained, more asset owners are looking towards secondary transactions and funds. Investors’ urgency for liquidity and the pressure on GPs to return cash to LPs before receiving commitments to their next vehicles has also heightened attention on secondaries.

IPO exits will become more challenging due to the tighter IPO controls spelled out in the state’s nine-point guidelines, Ping Gao, an associate partner at Bain & Co, said on a call with press on Tuesday.

“People are trying to diversify their exit channels. We have seen significant increase in secondary funds… for example, a direct transfer of the fund share or the portfolio equity. It wasn’t very usual in the previous years but it’s getting more and more common,” he added.

Partner Hao Zhou added that, in the short term, exiting portfolio assets via an IPO may become more difficult. Yet, in the long term, the changes could become an overall positive policy for China’s primary and secondaries markets.

“These policies are not targeted at PE funds specifically, it’s for the healthy development of the capital market. Such policies tend to be good for the long-term development of the Chinese market as a whole, be it primary or secondary market,” he said. “But in the short term, due to the new policy, there will be adjustment in the market and there will be both opportunities and challenges.”

China recorded about 400 secondaries transactions in 2022 – a figure that was 135 percent higher than the 170 deals recorded in 2017, according to Bain & Co. The total value of secondaries deals was $15 billion in 2022 compared with only $2 billion in 2017, the report noted. Exit values in the country, however, declined by 22 percent to $46 billion last year from $59 billion the prior year, according to separate data from Bain.

Global firms have been eyeing Chinese secondaries opportunities: Schroders Capital has seen discounts as high as 40 percent in yuan-denominated secondaries, its head of China private equity told Private Equity International last year. Coller Capital has also launched a dedicated for the Chinese RMB market while Hamilton Lane expects to hold a first close on its debut RMB secondaries fund by end-2024.

While the muted IPO environment may be an opportunity for secondaries in hindsight, this may impact exits for secondaries investments.

“From the funds’ perspective, secondaries are expected to continue to be one of the exit options in the APAC region. That said, a secondary investment is subject to exit planning itself,” Hong Kong-based partner Liyong Xing at Clifford Chance told Private Equity International.

“At the moment, based on what we have seen in the market, the lack of liquidity in the public market has affected the existing portfolio of the secondaries players in the region as well as their near-term deployment.”