Warburg Pincus Turns to China After Hong Kong IPOs Flop

Updated on
  • Private equity firm plans listings for eight Chinese companies
  • Three Pincus-backed IPOs are among worst performers of '15

Ignore the downbeat data on China’s economy and its volatile stock markets. For Julian Cheng, the new China co-head for the $38 billion private equity firm Warburg Pincus & Co., this year is shaping up to be a record one, at least by one metric.

The New York-based firm is aiming to take eight of its Chinese companies public in the coming 12 months. Last year’s four such listings was the most for a single calendar year since Warburg Pincus started out in China 22 years ago.

But unlike in previous years, when the typical exit path meant a listing in New York or Hong Kong, Warburg Pincus expects most upcoming share sales to happen on Chinese equity markets. The bearish sentiment toward China among overseas investors and the potential for higher valuations combine to make mainland listings the preferred option, he said.

“Ten years ago, every company we talked to was the me-too of China, the Yahoo of China, the Amazon of China, the eBay of China,” Cheng said in an interview earlier this month. Now, the companies coming to market are unique to the mainland and harder to explain to investors in Hong Kong or New York, especially at a time when "there’s negative sentiment towards China,” said Cheng, who took up his position in February.

Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Baidu Inc. are among Chinese companies that have rewarded investors with big IPO paydays -- all overseas.

Warburg Pincus has taken just one company public in China: Lepu Medical Technology Beijing Co., which debuted on Shenzhen’s exchange in 2009 and is up 21 percent from its offer price.

Explaining China

Among the companies that Chang said have high potential growth but are difficult to explain to foreign investors because there’s no easy overseas comparison is Uxin, an online site which allows dealers and individuals to buy or sell used cars. Uxin doesn’t have to compete with an entrenched network of used-car dealerships like in the U.S., because China’s car market is too new to for such businesses to have developed, according to Cheng.

Foreign investors sometimes find it hard to understand a market like China, where Internet companies are building businesses which lack traditional bricks-and-mortar competitors, Cheng said. Without an incumbent business to disrupt, online ventures can grab market share on a scale that’s unimaginable in the U.S., he said.

And then there’s the valuations. With the companies that make up the Shenzhen Composite Index trading at 40 times reported earnings, compared with 29 times for companies in the Nasdaq Composite Index, it makes more sense for Warburg Pincus to seek local listings for the firms it plans to bring to market this year.

Wobbly markets

Last year, Warburg Pincus listed four of its Chinese investments --  AAG Energy Holdings Ltd., Red Star Macalline Group Corp., Vital Mobile Holdings Ltd., and China Huarong Asset Management Co. -- all in Hong Kong. AAG Energy, Red Star Macalline and Vital Mobile have all lost at least 50 percent from their offer prices, placing them among the worst-performing IPOs of 2015. China Huarong has slipped 5 percent.

Peggy Wang, head of private equity in Asia for White & Case LLP, a New York-based law firm, said IPOs in China face a rocky year after the Shanghai Composite Index tumbled 19 percent since Dec. 31.

“I’m not sure anyone will be successful with an onshore IPO in China. The stock market is too wobbly,” she said, adding that there is uncertainty over the market’s direction and retail investors, who drive domestic stocks, appear to be shifting their money into property.

Future exits

Warburg Pincus has also invested in Mofang Apartment, which converts buildings into micro-apartments for China’s recent college graduates who come to the cities looking for jobs, but can’t afford skyrocketing urban rents. Warburg led a $100 million round of financing for another firm, called eDaijia, which started as a designated-driver app and has since joined in a strategic partnership with another Warburg investment, UCAR Inc. to offer Uber-like car-hire services. Warburg Pincus also invested in Liepin, a website that connects jobseekers and headhunters.

As well as listing the eight companies, Warburg Pincus may exit some of its China investments in the future through other means such as sales to strategic investors and block trades, Cheng said, without giving details. Chinese exits netted a total $810 million for Warburg Pincus and its investors last year, according to Asian Venture Capital Journal.

Cheng, 42, joined Warburg Pincus in 2002 and specializes in technology and media investments in China. His fellow co-head for China, Frank Wei, leads investments in health-care and consumer companies.

Despite his optimism, Cheng cautions that a flood of money into technology startup companies has driven valuations in that sector to unsustainable levels.

“Our view is there’s a day of reckoning coming,” he said. “Ultimately, private capital needs to get out, and you need to create an exit for them.”

(Updates to raise reference to Uxin to seventh paragraph, adds context on timing in 14th paragraph.)
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