Firms that take US-listed Chinese businesses private and hope to re-list them on Asian stock exchanges may be disappointed with returns, according to an industry panel.

By Clare Burrows

Private equity firms capitalising on the plummeting share prices of US-listed Chinese companies by doing take-private deals could be disappointed with returns, according to an industry panel webcast moderated by Yash Rana, partner at law firm Goodwin Procter.

Most Chinese businesses listed on US stock exchanges have had their share prices knocked down after a number were accused of accounting irregularities.

Stephen Seelbach, managing director and co-head of Morgan Stanley’s Asia-Pacific financial sponsors group had doubts about multiple arbitrage plays involving the firm privatising a Chinese business and re-listing it in Hong Kong or China, where its shares are likely to be more valuable.

One point raised was that getting control is not common. “Private equity would like to do more control deals, but often the founders have been unwilling to surrender control through that privatisation exercise,” Nicholas Norris, partner at Kirkland & Ellis law firm said.

Moreover, panellists doubt how successful these deals will be in practice from a returns perspective.

Some of these business are “extremely expensive” for buyers, says Derek Sulger, managing partner at China-focused private equity firm Lunar Capital. “It is only an opportunity when you can get value. In some cases there is a hefty premium being paid for these transactions.”

Seelbach added that private equity firms hoping to gain stellar returns from re-listing on more buoyant stock exchanges in Asia might now be disappointed. “What has become less clear over the last 12-18 months, as share [valuations] in Hong Kong and onshore China have gone down, is whether or not the re-listing thesis really works.”

He continued, “For a lot of companies listed in the US, their multiples are quite depressed. But when you look at the comparable multiples in Hong Kong, you are not necessarily looking at a 2x or 3x uptick. Given the amount of work required to take them private through the special committee process and the like, a lot of people are still scratching their heads as to whether or not the [re-listing] step is possible.”