China’s move to halt new company listings on its stock markets is offering private equity firms, hedge funds and sovereign wealth funds an opening to fill private companies’ funding needs, paving the way for more merger and acquisition activity.
After a plunge in share prices wiped out more than US$3 trillion of market value in three weeks from the middle of last month, China suspended initial public offerings (IPO) to close the pipeline of new issues, which tend to suck money out of the market.
To arrest the slide, regulators halted 28 IPOs earlier this month, and it is unclear when they will lift the ban.
Companies on the verge of listing are now faced with the task of finding new means of financing to grow their businesses. The longer the freeze lasts, the more likely companies are to need funding from alternative, more costly financiers.
Bankers, private equity investors and wealth funds are now sniffing around for opportunities as companies face tight liquidity conditions.
Tim Dattels, managing partner of private equity firm TPG Capital Ltd, said the sharp run-up in Chinese stocks had made it harder for private equity firms to strike deals, but circumstances were now more promising.
“We are dealing in a market now that is illiquid, nowhere to get listed and very little room to raise capital,” Dattels said.
“We are going to see a more normalized role for private equity as a provider of capital for growth situation and illiquid situations,” he said.
In many economies, bank finance is the first port of call, but not in China. Beijing’s repeated efforts to cajole banks to lend to small and medium-sized enterprises has failed as China’s biggest lenders prefer providing credit to less risky state-owned enterprises.
“Long-term capital providers such as sovereign wealth funds and family offices will have a constructive role in China should the IPO markets remain shut down for an extended period,” said Mayooran Elalingam, Deutsche Bank’s head of mergers and acquisitions in the Asia-Pacific region.
Chinese companies raised US$23 billion through stock market listings in the first half, according to Thomson Reuters data, and consultant EY had forecast a total of about 250 billion yuan (US$40 billion) for the full year. That could leave a funding gap for alternative financiers of about US$17 billion in the second half.
Dattels said his fund preferred healthcare, consumer, financials and technology sectors.
“We continue to be focused on buyouts and on growth investments in our core sectors,” he said.
Singapore state investor Temasek Holdings Pte is also willing to bet on China despite the volatility.
“We are actively building our position in the Chinese capital market,” said Wu Yibing (吳亦兵), Temasek’s head of China, adding that the short-term volatility might provide a good investment opportunity.
Among about a third of the 28 companies whose IPOs were halted, most said they would fund their businesses using existing cash and bank loans for now.
Some said they still wanted to pursue an IPO, while others were looking at alternatives.
While the inability to list companies creates an opportunity for alternative financiers, it also removes an avenue for them to cash out of their investment, which increases the likelihood of alternative exit strategies such as mergers and acquisitions.
“All of which is good news for deal making in China,” Elalingam said.
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