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

August 12, 2009 | BY

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Flexible offshore capital structures are likely to be attractive

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.”

According to Caijing magazine, China Mobile, one of the best-known red-chips, recently appointed China International Capital Corp (CICC) to arrange sales of A-shares. Soon after that, the vice-mayor of Shanghai was reported by the Shanghai Daily as supporting the 2010 launch of a new international board. China Mobile plans to list in Shanghai next year, and if it is successful, other red-chips companies (such as CNOOC and China Unicom) may follow suit.

“These companies will also appreciate the ability to be listed in their 'home market', attracting domestic investors and further raising their profile,” said Dapiran.

Regulators in mainland China have been pursuing a policy of raising the standard of the market by making more high-quality companies available to domestic investors, according to Dapiran, and encouraging the listing of red-chips is “consistent with the theme”.

Earlier plans to allow red-chips to issue China Depositary Receipts – instruments which foreign companies can use to allow Chinese investors to own their stock – were put on hold last year after the onset of the global financial crisis.

China Law & Practice will be taking an in-depth look at progress toward allowing foreign-registered companies to list in Shanghai in the September 2009 issue.

See also:
Anything but an easy ride for Shanghai 05 Jun 2009
Little red-chips get an overseas opening 08 May 2009
SAFE Crackdown: Round-trips, Private Equity and M&A 01 Apr 2005

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