Exiting a Private Equity Investment on the Chinese ‘A Share’ Market: The Impact of the IPO Lock-Up on Exit Valuations

Abstract

Private Equity investors exiting on the Chinese “A Share” markets in Shanghai and Shenzhen are subject to a compulsory 12-month lock-up, during which the sale of shares is prohibited. While this regulation aims to limit speculative investments in pre-IPO companies, it exposes private equity investors to significant liquidity, systemic and valuations risks. I evaluate the impact of the IPO lock-up on the exit valuations of private equity investments by analyzing the 1-day, 3-month and 12-month market-adjusted performance of 378 new equity issues on the Shanghai and Shenzhen stock exchanges for the period January 2004-October 2008. I document that 1) at the expiration of the lock-up IPOs earn a positive market-adjusted return of 14%, thus the IPO lock-up has a positive impact on private equity exit valuations; 2) same-sector IPO performance varies across the two “A Share” listing venues; and 3) IPOs lose 81% of their value during the first three months and additional 21% from the third month to the expiration of the IPO lock-up.