Pride Group veers towards China venture capital

The price of getting into private equity deals in China is on the up and up.

Entry prices for pre-IPO deals are 14 to 18 times price/earnings (P/E) ratios and if you want to get into early-stage private equity there is a tag of 7 to 10 times P/E. A couple of years ago, pre-IPO deals were priced at 8 to 10 times P/E and early stage was 5 to 7 times P/E.

The price is going up as more private equity firms chase deals, such as the influx of new domestic RMB funds. By way of comparison, the targeted exit P/E ratio for a fund that is conducting an IPO of a deal would be around 40 times P/E.

“These new funds have pressure to invest and get a return and at times they have to offer favourable terms in order to secure deals," says Lewis Wan, chief investment officer and chairman of Pride Group in Hong Kong.

He points out that many are family-office-type operations in which cashed-up wealthy Chinese club together for co-investment deals. They cater for investors who want a steady 10% annual IRR right through to ones who want a ten-times return over the life of a fund. 

“It is getting too expensive in pre-IPO deals in China, though early stage private equity entry pricing is still acceptable,” adds Wan. Accordingly his fund is looking more at the venture capital end of the spectrum. 

Pride Group is a China private equity specialist, with a $25 million closed-end, six-year fund named the Changzhou RMB Fund. It began business in 2008, got its approvals in 2009 and is now investing funds. Its investors are mainly from Hong Kong and Taiwan.

Pride Group plans to raise a total of $125 million in due course across its future funds.

The Changzhou RMB fund is completing four early-stage deals in sectors such as environmental protection, financial services and food & beverage. It envisages a three-to-four year exit before the companies are publicly listed, which it thinks will take place in Shenzhen or Hong Kong.