Red-chip listings to provide a new private equity exit route

The opening of China's capital markets to foreign-registered companies will present private equity houses with a new exit strategy, through listing in so-called red-chip companies.

Red-chips (large, usually state-owned, enterprises which are incorporated outside mainland China and listed in Hong Kong), along with other foreign-incorporated companies, are not allowed to list in mainland China. But it has been rumoured for several months that this situation is about to change, and if it does, private equity investors will get access to an attractive asset.

“Private equity investors generally prefer to invest in an offshore company which has a more flexible capital structure than a domestic PRC company,” said Antony Dapiran, a Freshfields Bruckhaus Deringer partner. “If these companies were also permitted to list in the mainland, this would open up an additional and attractive exit route for private equity investors.”