China's stock market turmoil heightened levels of uncertainty and angst among Chinese internet companies courting private capital but bankers say the wave of tech funding that began before the crash isn't over.
While tech companies such as Tencent, JD.com, Alibaba and Baidu have been big participants in pre-IPO funding rounds for internet and technology firms, generally making strategic investments with longer horizons, financial investors typically seek exits within a certain time frame.
Earlier this month China's regulators suspended new initial public offerings as part of efforts to stabilise the stock market — an act which could give investors pause.
According to S&P Capital IQ data, the top financial buyers in terms of the total number of private deals for tech companies in China during the first half of this year include East Ventures, Matrix Partners China, IDG Capital Partners, Sequoia Capital China and Tiger Global Management [see chart below].
“For most financial investors, the primary reason to invest in a private company is to generate a return through an IPO exit down the road,” said Philip Lee, director at S&P Capital IQ. “The volatility in the Chinese stock markets is causing a lot of uncertainty especially for private equity investors that have to re-think their exit strategy,” he added.
A clutch of Chinese technology companies including online education service TutorGroup, online shopping sites Mogujie and Meilishuo.com and China’s version of Airbnb, Tujia.com are engaged in private fund-raising rounds, with each company seeking $300 million to $500 million, people familiar with the matter told FinanceAsia end April.
The companies hoped to close respective funding rounds in the second quarter of the year but S&P Capital IQ data indicates none have.
Elsewhere, other Chinese internet companies are eyeing capital raising exercises down the road. Chinese peer-to-peer lender Dianrong.com for example, is looking to raise $300 million to $400 million around December this year, the company’s founder and CEO Soul Htite told FinanceAsia on the sidelines of DBS’s Asian Insights conference in Singapore on July 10.
A senior banker who looks at private placements told FinanceAsia that while larger companies such as Didi Kuaidi may be able to raise funds, smaller firms could experience difficulties.
In recent months, several companies have successfully tapped private capital to raise funds, often in multiple rounds. According to S&P Capital IQ, Chinese technology companies have raised a whopping $25 billion in private capital during the first half of 2015, dwarfing last year’s $10.8 billion raised in the same period.
Bankers expect that private placements will continue but perhaps at a slower pace. “Right now it’s a bit tricky to raise capital, but I don’t think it’s the end of it, I think it will come back,” said a senior Hong Kong-based tech banker.
Privatisations hit roadblock
While private funding is expected to continue, the trend of taking US-listed Chinese companies private may stop until the IPO spigot is turned on.
“The whole privatisation play of US-listed Chinese companies may have hit a road block now if the China IPO market remains shut for the time being,” said S&P Capital IQ’s Lee.
But there are exceptions.
On July 9, in the midst of the stock market tempest, Nasdaq-listed Chinese social messaging company YY received a non-binding offer from Jun Lei, YY's chairman (and also the founder of smartphone maker Xiaomi) and David Xueling Li, YY's CEO, to buy the company in a $2.5 billion take-private bid. Another Chinese e-commerce company Dangdang also received a management buyout offer to the turn of $417 million.
Prior to China's stock market sell-off, a flurry of companies were subject to take-private bids, including Qihoo 360, which received a $9.1 billion buyout offer from chairman and chief executive officer Hongyi Zhou, Citic Securities, Golden Brick Capital Private Equity, China Renaissance Holdings, and Sequoia Capital China, in what stood to be the largest privatisation of a US-listed Chinese company.
However, bankers expect a number of the management buyout/take-private plays could stall.
"A lot of the boards of US listed companies want to get the news out there because it's price sensitive, but for nine out of 10 of these take-private deals there is no plan, no financing and I suspect a large number of deals won’t get done because they are relying on large equity checks,” he added.
Data provider Dealogic said the total value of privatisations of US-listed Chinese companies year-to-date is $30 billion compared to $660 million for the same period last year.
