China cuts IPO waiting list

The China Securities and Regulatory Commission (CSRC) has begun a process of review aimed at shortening the waiting list for IPO approval in China's stock markets. All companies in the China IPO application process are encouraged to self-review until 31 March, and withdraw if they are not performing as well as expected, according to a CSRC announcement.

After 31 March, the CSRC will organise teams to conduct random background checks on applicants. “We have launched this special inspection in order to, in practice, move one step further towards deepening [our] previously revealed spirit of reform,” Gang Yao, the vice chairman of the CSRC, said in the statement.

Sabrina Tian, a Z-Ben Advisors analyst, believes that this could cut 300 or more companies from the now 880-strong IPO application list, and shorten the expected backlog to one to two years from the current five years.

The IPO backlog has been a big concern for private equity this past year because almost 75 percent of China returns have come from IPOs, compared to 15 percent worldwide, according to Lunar Capital partner Derek Sulger.

There are now 7,550 unexited investments in China that will have to look for other exit routes, according to a recent China First Capital report.

“They want to use this mechanism to offset bad market sentiment,” Z-Ben's Tian said. Last July, a scandal involving a fake company IPO prompted the CSRC to be much more rigorous in its application review process, but the resulting backlog has worried investors and businesses alike as to how the market can recover.

Around 300 companies in the 800-plus queue have private equity backing, Tian estimates. Although the CSRC is not being explicit about it, Tian believes “the implication is that those private equity-backed companies should withdraw” and look for other exit options. The CSRC “is really hoping for secondaries”, Tian said.

One of Chinese private equity’s greatest problems, according to CITIC Capital chief executive Yichen Zhang, is that the IPO market has been the driver of all growth capital strategies – most investments were made with an eventual IPO exit in mind. But with only 154 IPOs in 2012, according to CSRC statistics, Zhang believes that model is just not sustainable.

As of now, private equity firms in China are already looking at other exit options. For example, CITIC Capital is currently looking at two exits, and both are trade sales, according to Zhang.