Brokers lead in IPO exits

Investment units of securities brokers have been more active than venture capital and private equity firms (VC/PE) this year when it comes to cashing out the positions they took in initial public offerings (IPOs), although their returns were lower due to their higher initial investment costs, according to analysts contacted by the Global Times Wednesday.

Goldstone Investment Ltd, a subsidiary of CITIC Securities, was the most active investor in this regard, cashing in 9 IPOs this year; while GF Xinde Investment Management, under Guangfa Securities, ranked third with 6 cashed-out IPOs, the Securities Journal reported Wednesday.

"The securities brokers cashed in the investments they made in 2010 or 2011," Zhang Qi, an analyst with Zero2IPO Group, a consulting firm, told the Global Times Wednesday.

In the past, many securities firms had their direct investment subsidiaries invest in companies whose IPOs they underwrote in a bid to make quick money when the one-year lock-out period expired.

It was convenient for them to invest in their own customers and, compared with VC/PE firms, they have shorter investment periods, Zhang explained.

Since such activities could lead to conflicts of interests and are regarded as unfair to other investors, Chinese securities regulators banned this kind of practice in July 2011. Yet, securities firms now routinely share IPO information with each other instead of investing in their own customers, said Zhang.

Pre-IPO investment - in which securities firms invest in a company planning to launch an IPO with the intention of selling off their stake once the company gets listed - is the most common way for securities firms to exit their positions, accounting for nearly 90 percent of the unwound cases in recent years, Zhang said. Yet fierce competition for pre-IPO projects last year pushed up the value of the target companies as well as the bid prices of investors looking to take shareholdings, thus lowering investment returns when the time came to cash out.

The average return on securities firms' direct investment is 3.35 times their initial cost so far this year, less than the 4.65 times rate recorded in 2011, the Securities Journal reported.