When Bob Partridge of Ernst & Young LLP was advising a global private-equity firm seeking to buy half of a Chinese kitchenware maker in December, due diligence revealed the company’s net income to be a third less than expected. Still, the founder insisted on his asking price, 23 percent higher than publicly listed peers.
The $75 million being sought, which the owner said reflected “China’s future prospects,” valued the company at almost 20 times its earnings, according to Partridge, an Ernst & Young partner covering China, Hong Kong and Taiwan. Comparable stocks in the MSCI China/Consumer Discretionary Index, which tracks 17 Chinese consumer companies listed in Hong Kong, are trading at 16.2 times earnings. In other markets, including the U.S., private-equity valuations are typically lower than similar listed companies.
“People are still of the mindset of 2010,” said Partridge, who wouldn’t identify the parties involved citing confidentiality. “They don’t have the sense of urgency driving them to change their valuations expectations.”
Many Chinese private companies are seeking prices dating back to a time when the nation’s economy was growing at more than 10 percent, compared with 7.8 percent last year. They aren’t budging even as the number of private-equity deals in China fell an unprecedented 43 percent last year and domestic initial public offerings, which private-equity firms count on to exit the investments, tumbled 70 percent. There have been no domestic IPOs this year, and new deals are virtually halted.
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