Shanghai's Proposed Tech Board to Offer Clear Exit Channel for Venture Capital
An Zhuo
/SOURCE : Yicai
Shanghai's Proposed Tech Board to Offer Clear Exit Channel for Venture Capital

(Yicai Global) Nov. 7 -- China's plan to set up a high-tech stock trading board in Shanghai with easier listing requirements will attract new economy players to the mainland market and provide a perfect exit channel for venture capital funds, according to insiders.

President Xi Jinping announced the initiative in his keynote speech two days ago at the opening ceremony of the China International Import Expo in Shanghai.

The board will bring a positive cycle for the primary market and a clear way for venture capital and private equity to make money from investments, Cen Saiyin, vice-president of Cornerstone Capital, told Yicai Global.

Limited opportunities to monetize investments have curbed the growth of the domestic PE and VC sectors over the past two years.

"We estimate that the overall PE exit rate in China is only around 15 percent over the last two years, and VCs fail to exit most projects," said Wu Ge, executive partner at Adept Capital Management. "Among those projects which venture capital failed to exit, one-third face difficulties in development."

Some even default mainly because of a decline in performance, Wu said. A number of "projects have failed to go public despite operating normally, triggering buyback terms and resulting in default," he added.

The board will encourage investment in startups and the primary market in the long term, accelerating the formation of new economy leaders, Cen said. He believes a batch of new tech giants similar in scale to Baidu, Alibaba, Tencent and JD are likely to emerge in the domestic capital market thanks to the policy.

Once the new board is up and running, overseas initial public offerings will no longer represent the only option for biopharma companies, since profitability will no longer be a must for them, Cen added.

Startups could also enjoy high valuations and premium prices in the domestic market, he added. Pfizer, for example, has an 11-fold valuation in the US market, while A-share listed Hengrui Pharma enjoys a 50-to-60-fold valuation.

"Undoubtedly, it is good news for PE investors, especially for domestic funds which use the yuan for investment," a private equity insider told Yicai global. "When it comes to investing in tech, media and telecoms startups, these funds currently face problems in raising money and exiting channels have been limited.

"Without a board for tech startups, revenue and profit remain the two major indicators used by the domestic capital market for target company assessments," the insider said, adding that this can lead to startups accepting investment from overseas funds.

"The new board will also be beneficial for domestic investors in terms of sharing earnings brought by growth in the high-tech industry," he added.

Cornerstone Capital's Cen expects the board's formation to signal a selection period for superior tech startups, while inferior ones will fall by the way. Valuations of so-called tech firms that rely on solely on concepts are expected to fade, he added.

Editor: William Clegg

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Keywords: Technology Startups , Startups , IPO , VC, PE, Stock Market Reform