Industries > Finance

Investor Interest in Chinese Tech Begins 2019 Not With a Bang but a Whimper

Xinhua Financein The Wall Street Journal
2019-01-07 16:32

Already collect


Thousands of private Chinese tech companies raised a record $69.4 billion in equity in 2018, but the volume of stock sales has dropped off sharply of late
 
The flood of money rushing into Chinese internet startups has slowed, dashing hopes of quick windfalls for many investors.
 
Just six months ago, investors from the U.S. to Hong Kong were pouring cash into internet companies in China that were raising funds privately or going public, sending valuations soaring. Then, a sharp turn in markets during the summer hammered the share prices of many newly listed tech companies, sending a chill through the sector. Large investors say there is still money to be made in the sector, but they are more selective about what to invest in.
 
Thousands of private Chinese tech companies raised a record $69.4 billion in equity financings in 2018, up 63% from 2017, according to CB Insights. The sum was also more than triple the $21.4 billion that Chinese tech firms raised in a busy 2018 for initial public offerings, according to Dealogic.
 
The volume of stock sales has dropped off sharply of late. While some companies are still moving forward with listing plans, many have scaled back their fundraising ambitions. At least a dozen Chinese tech IPOs have been downsized or postponed in the last couple of months, according to bankers, and companies that earlier aimed for larger IPOs have had to settle for fractions of their fundraising targets.
 
They included Tencent Music Entertainment Group , which in December priced its New York IPO at the bottom of a proposed range and raised $1.1 billion, or about half of an earlier goal. Its market valuation at listing was also 20% less than its earlier target.
 
Turbulent markets are also roiling companies that have yet to go public. “We’re starting to see cracks in private valuations for Chinese technology companies, making us cautious in the near term,” said Anton Levy, a managing director and global head of technology at private-equity firm General Atlantic.
 
The result is a funding lull for many smaller companies that could continue for a while. Some investors say the correction in private markets could last another six months and that valuations for some firms could even fall.
 
“Some rationality has returned to China’s private fundraising industry after years of irrational growth,” said Zhou Wei, founder of China Creation Ventures, a venture-capital firm that focuses on early-stage investment in tech and media startups. He said tighter liquidity in mainland China has also made domestic investors wary.
 
In hindsight, some bankers say several public and private deals were priced too aggressively as investors eagerly bought into companies’ optimistic growth projections.
 
Smartphone maker Xiaomi Corp. and e-commerce bookings app Meituan Dianping , which each raised more than $4 billion in Hong Kong IPOs in June and September 2018, have lost more than one-fifth of their market value. Most of the other IPOs of Chinese tech companies have also underperformed the broader market.
 
Some say the market wasn’t ready for the influx of large deals in 2018. A global selloff in tech stocks didn’t help, either.
 
Bankers are expecting lower IPO volumes in 2019 in Asia compared with 2018. Instead, more companies could opt to raise funds through other means, such as by issuing convertible bonds.
 
Still, market volatility doesn’t change the long-term opportunities that Chinese tech companies present, said Aaron Arth, head of the financing group for Asia excluding Japan at Goldman Sachs Group Inc.
 
“Investors will price that risk,” he said. “Some of the noise from geopolitical and market events will impact valuations, but it won’t impact access to capital broadly.”
 
General Atlantic’s Mr. Levy said the private-equity firm remains bullish in the long term on businesses built on stronger foundations and that have the potential to become top players in their fields regionally and globally.
 
Evidence of that comes from some industry front-runners who have had no trouble attracting investors. Bytedance Ltd., a Beijing-based startup that operates a popular Chinese news-aggregation app and short-form video platform, recently raised $3 billion from private investors in a deal that valued it at $78 billion, more than double what the company was worth a year ago. Bytedance is also in talks with banks on new credit lines.
 
An IPO of the fast-growing company could take place as soon as 2019, and investors are expecting other highly valued Chinese tech giants Ant Financial Services Group and ride-hailing business Didi Chuxing Technology Co. to advance their listing plans in 2019 or 2020.
 
Indeed, many investors still have large sums of money to put to work, even if they have become more discerning about what companies they invest in. Asia-focused private-equity and venture-capital funds are sitting on $336 billion in “dry powder,” money they can deploy in companies in the region, estimates industry research firm Preqin.
 
Years of robust fundraising have led to record levels of "dry powder" at private-equity and venture-capital funds focused on Asia.
 
Investors are also now in better negotiating positions. One tech investor said companies have become more flexible on terms for IPO exits down the road.
 
In 2017, for instance, deal terms often specified that investors who provided private capital could redeem their investments if the companies hadn’t gone public after five years. More recently, some agreements have shortened that wait to three or four years, adding some urgency for companies to move toward listings.
 
Source: The Wall Street Journal
Add comments

Latest comments

Latest News
News Most Viewed