Sell-down theme continues in small sizes

Private equity fund H&Q raises $55 million as it exits from Korea's Hyunjin Materials, while a pre-IPO investor in US-listed E-House cashes in $26 million.

Long-term investors continue to take advantage of the rebound in equity markets over the past month to secure profits, with two more blocks completed yesterday. Private equity fund H&Q Asia-Pacific sold its 13.9% stake in Korea's Hyunjin Materials in a deal that raised about $55 million after being priced at the top. And a pre-IPO investor in Chinese real estate agent E-House China Holdings reaped $26 million by selling part of its stake in the US-listed counter.

While sizes are still small in absolute terms, some of the recent divestments have been quite significant either as a portion of the company (as in the case of Hyunjin) or in terms of trading volumes; thus the preference for doing deals through the capital markets as opposed to dribbling out the shares in the open market where they would be almost guaranteed to push the price lower after the first couple of trades.

This is an almost perfect time for sell-downs. Not only have the equity markets been on an upward trend since mid-March -- and many individual stocks for even longer than that -- but fund managers are also sitting on a lot of cash that they are keen to put to work, or run the risk of underperforming those of their peers who have already re-entered the equity markets and are now riding the uptrend.

Indeed, bankers say this is likely to be a key theme in the Asian capital markets over the next two to three months. And the more deals that get done successfully, the more sellers are likely to emerge in the hope that they too will be able to monetise some of their holdings.

Market participants note that there is a lot of dialogue going on and banks are sounding potential deals of varying sizes on a daily basis. The larger deals are still expected to stem from the banks, and April 28 remains a key date in this respect as that is when the lock-up on Industrial and Commercial Bank of China's pre-IPO investors expires. Goldman Sachs, which owns 4.93% of the lender, agreed in March to hold on to at least 80% of its stake until April next year, but is still free to sell as many as 3.3 billion shares, which at the current market price are valued at $1.9 billion.

At the same time, Allianz Group and American Express, which also bought shares in ICBC as a part of the pre-IPO investment round in 2006, can both still sell half their stakes from April 28 (and the other half six months later). Allianz's 1.93% stake is the larger of the two and a sale of half of that could fetch as much as $1.85 billion.

By comparison, yesterday's sale of 1.98 million shares in Hyunjin was tiny, but still attracted a fair amount of interest. The company is active in the metal material forging industry and having initially focused primarily on parts for ship engines it has gradually been shifting its focus towards parts for wind power plants, making it a player in the renewable energy industry.

According to the term sheet, the initial intention was for the order book to stay open until 9pm Hong Kong time, but sole bookrunner UBS decided to close it after only one hour at 4pm (it did flag that it may do so) after the deal was already multiple times covered and the quality of the demand was deemed sufficient to fix the price at the top of the indicated range.

The shares were offered in a range between W34,950 and W36,500, or at a discount ranging from 4.9% to 9% versus yesterday's closing price of W38,400. The final discount of 4.9% is towards the low end among recent Asian block trades and resulted in a total deal size of W72.4 billion ($55.4 million). Not surprisingly, given Hyunjin's small-cap status -- it has a market cap of $427 million and is covered by only two international research houses -- a large portion of the buying interest came from domestic Korean investors. All-in-all, more than 25 accounts were said to have participated. H&Q bought its stake through two funds in 2006 and, according to sources, has more than doubled its money since then.

The E-House offering, which was arranged by Credit Suisse, was also priced at the top after being offered to investors in a range between $10.75 and $11.50 -- a 5.4% to 11.6% discount versus Monday's closing price of $12.16. The seller, CHF Investment, sold 2.26 million shares, which resulted in a total deal size of $26 million. The investment company will have a 60-day lock-up on its remaining shares.

The stock has had a strong run lately, including a 28% gain over the past two sessions alone, making this a tempting time for a pre-IPO investor to take profits. The company is still well below its highs of $36.45 from October 2007, and is currently also trading slightly below its IPO price of $13.80. However, someone who bought into the company before it went public in August 2007 is bound to have been able to make a handsome profit even at today's levels. Underlining the nice timing of the deal, the share price dropped 11% in US trading overnight, finishing at $10.82. The drop came as the market put an end to three straight days of gains and given the small size of the block, it is difficult to blame the fall on this deal, although the fact that a pre-IPO investor is cashing out could potentially be seen as a negative signal.

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