With the market for initial public offerings in Greater China weakened amid the U.S.-China trade war, private fundraising is thriving. But late-stage investors might not see a return until the market improves, analysts and asset managers said.
Weakened IPO market
The number of technology, media and telecommunications companies seeking an IPO in Greater China has tumbled since a recent peak of 32 offerings in the second quarter of 2017, according to data compiled by S&P Global Market Intelligence. Despite the drop in volume, gross proceeds from China-based technology, media and telecommunications, or TMT, IPOs soared in the third quarter of 2018. However, the value bump was short-lived. Some of the biggest IPOs that quarter were also among the biggest post-IPO disappointments.
One example is Chinese handset maker Xiaomi Corp., which raised US$4.72 billion in its July 2018 IPO, the second-highest Chinese TMT IPO of the quarter. The company saw its share price sink after going public. More recently, volatile trade relations have led Chinese tech companies such as artificial intelligence provider Megvii Technology Ltd. and online gaming company DouYu International Holdings Ltd. to delay plans for public listings.
Strong private investment
Meanwhile, valuations in pre-IPO fundraising rounds have soared. This has made it difficult for companies to IPO and get a good return for early investors in current conditions, said Ke Yan, co-head of research at Aequitas Research, in an interview.
Some of the much-anticipated Chinese tech IPO hopefuls include ride-hailing company Didi Chuxing Technology Co. Ltd., which has raised US$20.6 billion since its founding in September 2012, and Beijing ByteDance Telecommunications Co. Ltd., which has raised more than US$4.3 billion since March 2012.
"The only way out for investors of companies like Bytedance is to IPO," Yan said, noting that any potential acquirer of a company valued as highly as Bytedance would need a considerable war chest to fund such a deal.
Such highly valued companies will need to wait for market conditions to improve to resume IPO efforts, the analyst said.
Even if IPO hopefuls wanted to shift tactics and pursue a sale, such a move would come at a cost. Some companies may be too financially invested in an IPO strategy to change, said Tam Tsz Wang, a TMT equity analyst at DBS Group Holdings Ltd. He also said the health of the IPO and M&A markets tend to be related.
"If the corporate investors do not want to buy into these companies' IPOs, they will not buy in M&A deals either," Tam said.
The M&A market for Chinese TMT companies has been choppy in recent years, with some recovery seen in late 2018 and early 2019. Recent quarterly deal totals remained below a three-year peak of 184 deals in the third quarter of 2016, according to S&P Global Market Intelligence data.
For smaller companies not already invested in an IPO strategy, a sale could be a good strategy for early investors to make a profitable exit, Aequitas Research's Yan said.
For instance, Chinese dating app Tantan Culture Development (Beijing) Co. Ltd.'s sale to Momo Inc. for US$816.68 million in 2018 allowed China Creation Ventures to exit its investment, said managing partner Zhou Wei. Tantan, founded in 2014, raised US$120 million in four rounds of funding before the acquisition.
Zhu Chao, CEO of the asset management agency company Lixiangjia, said M&A may attract some buyers interested in accumulating strategic assets even if valuations are not ideal. For example, Alibaba Group Holding Ltd. acquired food delivery company Ele.me at a valuation of US$9.5 billion in 2018 because it was interested in expanding into food delivery and had the resources for a large deal.