Recently, several private equity funds have invested in listed companies through agreement transfers. What is the reason behind this?

Recently, Shanghai DZH Limited announced that the controlling shareholder and actual controller, Zhang Changhong, signed a 'share transfer agreement' with Jia Yi Asset in Shenzhen. Zhang Changhong intends to transfer 0.1 billion shares of the company's freely tradable shares through an agreement transfer to Jia Yi No. 1 Fund, representing 5.0003% of the total share capital of the company. The share transfer price is 7.36 yuan, and the total transfer price of the shares is 0.737 billion yuan.

Shanghai DZH Limited is not an isolated case. According to the statistics of Cailian Press, in the past two months, nearly 10 listed companies including Shanghai DZH Limited, Zhejiang East Crystal Electronic, Huizhou China Eagle Electronic Technology Inc., Broadex Technologies, Dongguan Mentech Optical & Magnetic, and Inly Media Co., Ltd. have issued indicative announcements, progress or completion announcements of agreement equity transfers with private equity funds. The proportion of equity transfers in many cases exceeds 5%.

Regarding the reason for private equity's participation in these company investments, a private equity investment director who participated in the above investments told Cailian Press that it is mainly based on confidence in the market and the company's future stock price. Moreover, agreement transfers generally come at a discount in stock prices, making it a more rational investment form. However, this also raises concerns about whether major shareholders are suspected of using agreement transfers to bypass reducing their shareholdings and cash out.

Frequent agreements for major shareholders to transfer shares

In recent times, the form of investment where the actual controllers or major shareholders of listed companies transfer shares to private equity funds through agreements has become a new trend.

According to statistics compiled by Cailian Press, in just the two months since September, multiple private equity products under Jia Yi Asset, Huazhou Investment, Ningbo Ningju, Runyuan, Quanqiao Fund, and Hangzhou Helin have engaged in equity changes with listed company actual controllers, controlling shareholders, or shareholders holding more than 5% stakes through agreement transfers.

PaiPai.com wealth management consultant Yao Xusheng told Caijing reporters that, from the perspective of regular agreement transfers, compared to buying stocks on the secondary market, private equity has multiple advantages in acquiring equity from shareholders of listed companies, specifically:

Firstly, private equity negotiates directly with listed company shareholders on transaction terms, including transfer price, quantity, payment method, etc., allowing private equity to tailor the most suitable transaction scheme according to their own investment strategy and risk preferences.

Secondly, agreement transfers have high flexibility and customization, enabling rapid large-scale equity acquisitions. Compared to gradually buying on the secondary market, agreement transfers can avoid the stock price volatility risk and uncertainty of acquisition time that secondary market transactions may bring.

Thirdly, when private equity funds engage in agreement transfers with listed company shareholders, they may obtain key information about the company, helping to more accurately assess the company's value and investment potential.

Fourthly, in some cases, agreement transfers may provide opportunities for tax planning for both parties, reducing tax costs.

Industry insiders: Need to be alert to the risks of reducing holdings through third-party channels.

From a private equity perspective, it is normal to significantly increase holdings close to the triggering of the mandatory takeover bid threshold based on a positive outlook on the listed company. However, the frequent occurrence of equity transfers between private equity funds and listed companies in the form of agreements in recent times has also raised speculation and discussion in the market about potential reductions in holdings.

The new "Nine Articles" and the Interim Measures for the Administration of Reduction of Shares by Shareholders of Listed Companies have strictly regulated the reduction of holdings by major shareholders. The new regulations impose stricter restrictions on the agreement transfer model, requiring the transferee to lock the shares for six months after the transaction. If the transfer results in the loss of the original major shareholder's status, they must continue to comply with the six-month reduction limit. At the same time, for cases of judicial enforcement and pledge default disposal, the new rules adopt the same handling method as centralized bidding, block trading, and agreement transfers, treating agreed repurchase transactions as pledge default disposals.

Some institutional individuals told Caixin reporters that the main reasons for private equity institutions and listed companies to choose agreement transfer of shares include various aspects:

First, the new rules on share reduction have strict limitations on major shareholders and directors' and supervisors' illegal reduction behavior, while also blocking various channels for indirect reductions.This has led many small-cap companies to find it increasingly difficult to meet the requirements for block trading and bidding reductions, prompting them to turn to agreement transfer as a compliant channel for reducing holdings.

Secondly, the peak period of lifting restrictions and market factors such as price declines leading to falls below the IPO price, have prompted shareholders to reduce their holdings through agreement transfers.Especially during price declines, agreement transfer becomes a choice for shareholders to reduce holdings, in order to avoid causing a greater impact on stock prices by directly reducing holdings in the secondary market.

Thirdly, during market downturns, listed companies introduce investors or strategic partners through agreement transfers to achieve industry synergy or optimize asset structure.

Fourthly, some major shareholders of listed companies use agreement transfers to deal with financial problems, such as repaying pledged financing or fulfilling obligations in pledge repurchase defaults.

In light of this, Yao Xusheng also believes that agreement transfers can facilitate share transfers without directly impacting market prices, contributing to maintaining price stability. Agreement transfer, as a compliant method of reducing holdings, helps shareholders of listed companies comply with relevant regulations and avoid risks of illegal reductions. Furthermore, agreement transfers do not directly take place in the secondary market, resulting in lesser market impact and aiding in maintaining market stability.

At the same time, Yao Xusheng pays attention to some potential risk points for investors: For example, when listed company shareholders transfer equity agreements to private equity funds, it may be a way of 'indirect shareholding reduction', which may affect the company's stock price and market confidence. If the shares to be transferred are pledged, frozen, etc., the overall process of handling the agreement transfer will be relatively cumbersome, requiring third-party cooperation. Due to the large amount of money involved in the share transfer agreement, and the long time required, it is especially important to protect the funds during the transaction process. Setting up escrow accounts and making staggered payments based on milestone completion can help protect the funds.

In addition, private equity managers need to pay special attention to compliance issues, especially under the new regulations on reducing shareholding, it is important to ensure that the transactions comply with regulatory requirements.