Try to diversify
The most common method for China's PE and VC firms to cash in on their investment is by selling shares in companies after their initial public offering (IPO). But Zheng says this is now holding back the sector.
"They need to diversify ways of cashing in, and buying shares in firms involved in mergers and acquisitions (M&A) could offer an opportunity," Zheng noted
Last year, 111 among 123 PE firms in China sold shares in companies that had just floated, while only six of them cashed in through selling shares in enterprises that had been acquired by other companies, Xie Wenli, deputy manager of the investment banking department at China Merchants Securities Co, was quoted as saying by China Economic Herald.
The situation is similar to the US in the 1980s, when nearly 90 percent of PE funds relied on selling shares in enterprises after they went public, according to the US National Venture Capital Association.
In September this year, Suning Appliance Co announced it would spend $66 billion to purchase redbaby.com, a maternal and children's products e-commerce company, which had earlier received capital investment from PE and VC funds including Northern Light Venture Capital, New Enterprise Associates and KPCB China. These firms were all able to cash in by selling their stakes to Suning.
"Setting up a special fund to help companies engage in M&As is also a feasible method, as some small-sized enterprises have encountered operating difficulties and industry consolidation is a likely trend," said Huang Song of Peking University.
Huang also encouraged PE firms to seek profits from M&As overseas, especially in developed countries with advanced industrial technologies.
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