Record Number of Asian Venture Capital Exits: The New Third Board Effect – June 2016

by Wilson Su

  • 29 Jun 2016
  • PE

Mid-2015 saw Chinese regulators block IPOs on China’s two largest markets, Shanghai and Shenzhen. This led to a surge in activity on Beijing’s third board, commonly known as ‘New Third Board’. The rapid growth in the number of companies listed on this OTC exchange has led to a thriving IPO market for SMEs in China; using Preqin’s Private Equity Online database, we analyze how the private equity exit market has been affected by the rise of the New Third Board.

The aggregate value of venture capital exits in Asia has fluctuated since 2008, reaching a peak in 2014. Conversely, the number of exits has experienced steady year-on-year growth since 2008, excluding 2011; the number of venture capital–backed exits increased from the low of 61 in 2008 to a record 304 in 2015. The peak of $40bn in aggregate exit value seen in 2014 was largely skewed by the blockbuster $25bn IPO of Alibaba, which accounted for 63% of the entire  aggregate exit value for that year; aside from this, the industry has seen steady growth in aggregate exit value since 2012.

The substantial value of 2014 venture capital exits in Asia accounted for 31% of the global total – the highest annual global share since 2007 – while the number of exits in 2015 accounted for a quarter of the global number of exits in 2015, the largest annual proportion accounted for by Asian exits in the past decade. Despite the 2014 growth being attributed to Alibaba, the increase in the number of exits seen in Asia during 2015 is not skewed by anomalies and is a clear indication of the growth of private equity in the region.

China has been the most active economy for Asian venture capital exits since 2007, accounting for 61% of all Asian exits in terms of number and contributing 91% of the total exit value. However, with increasing venture capital activity in India, China’s dominance with regards to the number of exits in the region has been decreasing gradually. In 2015, China saw 154 venture capital exits, which constituted 51% of all exits in Asia – a decline of 24 percentage points from the 2007 proportion. On the other hand, India has seen an increase from 14% of all venture capital exits in 2007 to 31% last year. Despite this growth outside China, the country is still dominant when it comes to the value of exits, representing 87% of the value of all Asian exits in 2015.

Exits via public markets are the most prominent divestment route in China. IPOs and follow-ons/private placements have accounted for 50% of Chinese exits in terms of number and 67% in terms of aggregate value since 2007, peaking at 74% and 93% respectively in 2010.  Despite the volatility of the Shenzhen and Shanghai stock exchanges in the past year, 60% of Chinese venture capital exits in 2015 were still completed via IPOs and follow-ons; however, the value accounted for just a third of the total, a sharp decrease from 84% in 2014. This may be due to the activity in the country’s New Third Board (the National Equities and Exchange Quotations), which provides a new exit channel for domestic portfolio companies: it saw a significant increase in the amount of companies listed on the exchange in 2015. It has a lower listing threshold and is more accessible for SMEs than listings on the large stock exchanges, potentially driving the lower value of IPO exits seen in China during 2015, despite the number of exits via public markets increasing from 55 in 2014 to 93 in 2016.

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