New board means VC, PE opportunities

By Wang Xinyuan

The 10 year wait for China's own Growth Enterprise Board (GEB), also known as ChiNext, will finally be launched on October 30, according to the China Securities News.

The GEB is a great opportunity for venture capital (VC) and private equity (PE) firms, said Zhao Hui, partner at Oriental Fortune Capital, at the 2009 ChinaVenture Investment Conference held on Wednesday in Beijing.

Before the GEB, there were only two boards: the main one for large companies and the small- and medium-sized enterprise (SME) board. The GEB has lower requirements for listings than the already-existing boards, giving smaller companies a chance to go public.

"The majority of the SME board-listed companies are in manufacturing," which leaves limited choices for VC and PE firms, said Zhao.

"With the GEB trading, however, high liquidity which will facilitate the exit of VC and PE firms will come into play, and there will be a variety of new areas other than manufacturing to invest in. Meanwhile its relatively lower threshold will help VC and PE firms get involved in projects at earlier phases of development," Zhao noted.

About 23 of the first batch of the 28 recently listed on the GEB are backed by VC or PE firms, noted Li Xuegang, managing partner of CMHJ Partners.

The involvement of VC and PE firms may help win the regulator's approval of small companies attempting to get listed because they may have better management structures, Huang Jingsheng, managing director of Bain Capital, told the Global Times.

The average IPO price earnings ratio of the first batch of the 28 GEB-listed companies, however, exceeded 50, much higher than those of firms listed on the main board and the SME board.

The high prices may have a negative impact on VC and PE firms when they attempt to sell the company. Entrepreneurs' price expectations will make them ask for an unreasonable amount, leading to difficulty closing the deal, said Huang.

"With the rebounding equity and housing markets due to the stimulus package, price earnings ratios all rose," commented Chen Shiyou, managing director, head of private equity at CICC.

The price inquiry mechanism often leads to a high price earnings ratio, resulting in abnormal speculation and heavy losses for individual investors, Cao Fengqi, director of Research Center for Finance and Securities, Peking University, said to the Guangzhou Daily.

The VC and PE sector has been hit hard since the financial crisis. In the third quarter of 2008 there was a 70 percent drop in the number of PE and VC investments in China, according to a report by ChinaVenture Investment Consulting.

But the sector has bounced back, with the number of VC and PE investments jumping by 42.5 percent year on year to $1.74 billion in the second quarter of 2009, up 179.9 percent from the first quarter when the VC and PE market bottomed out, according to the report.

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