By Paul J Davies

Asian private equity managers have poured cold water on hopes that the reopened market for initial public offerings in China will spark a flood of profitable sales, and free up the industry to raise more money and stimulate deals.

Private equity investors across Asia, and especially in China, have struggled to exit investments because IPO markets have been sluggish in Asia broadly and closed in China.

Private equity groups in Asia have in the past relied heavily on stock market listings to sell out of their investments, and a wave of exits in China had been expected once markets reopened this month.

However, private equity investors and managers now realise that their companies are at the end of a queue of 700-plus IPO hopefuls in China.

David Pierce, a partner at Flag Squadron, the Asian arm of a global fund of funds business, said private equity groups must be more realistic about their options for some investments, particularly those marked up to the value of a hoped-for listing that is unlikely to happen.

“The idea that the IPO window reopening is going to solve all of our problems is just not true,” he said.

A survey by consultants EY and data providers Mergermarket found that the Asian private equity industry expects a long wait until it can again use IPOs as an exit route.

The industry saw just 20 IPOs raise $2.8bn across Asia in 2013, but there were 166 trade sales worth $31.5bn.

In contrast more than half of last year’s European IPOs were private equity-backed companies, while the US also saw some big private equity exits such as the $2.4bn raised by Blackstone-backed Hilton Hotels.

Eric Solberg, a former partner at CVC and now head of his own private equity investment group EXS Capital, suggested that a strong public equity market would actually hamper Asian private equity groups.

“A successful IPO market will make it harder for private equity firms to gain control [in new investments] and means we will likely have to pay more for deals . . . if the market heats up too fast, both entrepreneurs and retail investors will get unrealistic expectations again about value and our conversations will become very difficult.”

Derek Sulger, a partner at China-focused firm Lunar Capital, said the industry must focus much more on secondary sales, sales to trade buyers and other routes to returning profits to investors.

The total value of Asian buyout deals shrank from $33.1bn in 2012 to $29.1bn in 2013, according to Mergermarket. Within this, the value of inbound deals by global private equity firms was $6.5bn, down from $8.2bn the previous year.

In spite of the small deal volumes, private equity groups have continued to add to their fun war chests. KKR added a $6bn Asia-only fund and CVC raised $2bn for Asia, while South Korea’s MBK raised a $2.7bn fund and Hong Kong-based Affinity raised $3.5bn.