If listing in Hong Kong becomes the only viable option, funds will likely need to rethink investment strategies given practical differences with how New York stock exchanges handle initial public offerings.
For tech companies, listing in Hong Kong could mean lower valuations than if they listed in New York, said Richard Chen, managing director with Alvarez and Marsal’s Transaction Advisory Group in Asia.
“Due to uncertainty over exiting, we slowed our pace of investment in the second half of last year,” said Ming Liao, founding partner of Beijingbased Prospect Avenue Capital, in Chinese, according to a CNBC translation.
BEIJING — Investors may have to think twice about whether to bet on Chinese tech startups as new regulations are imposed on mainland companies looking to go public in the U.If
listing in Hong Kong becomes the only viable option, fund managers will likely need to rethink their investment strategies, as there are practical differences with how New York stock exchanges handle initial public offerings.
Since the summer, both China and the U.have raised the bar for Chinese companies wanting to trade in New York.
Not only investors are affected Chinese companies looking to raise capital face greater uncertainty about their path to listing on public stock markets, and possibly lower valuations too, analysts said beijing’s actions have more imminent consequences.
Beginning Feb 15, China's increasingly powerful Cyberspace Administration will officially require data security reviews for certain companies before they can be listed abroad.
Aside from the technical complexities of why and how Chinese companies partnered with foreign institutional investors to get listed in the US, the new regulations could mean that similar IPOs are likely to have to go to Hong Kong in the future.
For tech companies, that could mean lower valuations than if they were listed in New York, said Richard Chen, managing director of Alvarez and Marsal.
Transaction Advisory Group in Asia he said a market familiar with Silicon Valley could value a tech company's growth potential more highly than Hong Kong's greater focus on profitability and familiarity with business models for companies operating brick-and-mortar stores or working in areas like semiconductors.
And precision engineering with the new Chinese regulations, Chen said, his clients -- mostly traditional private equity firms -- are looking more at traditional industrial companies and companies that sell to other companies or sell to consumers without relying heavily on technology.
"This is what our clients think: 'Does it make sense to look at these sectors when listing in the US is challenging given the regulatory concerns?'"
Chen said.He added that clients are also reassessing their investment strategies and considering whether their minimum return targets may be more difficult to achieve because a Hong Kong listing has resulted in a lower valuation.
What this means for investors Given the potential for lower yields or the inability to exit investments in a predictable time frame, many investors in China are reluctant to make new bets.
That is, if they can raise money for their funds to begin with Preqin Pro data shows a sharp decline in fundraising by those denominated in US dollars and yuan venture capital and private equity funds focused on China in the third and fourth quarters of 2021.
less than $2.43 billion in 2019 and $5.13 billion in 2018, Preqin said.
While startups may be looking for support, U dollardenominated funds focused on China have been sitting on capital.
A measure of undeployed funds, known as dry powder, reached $45 billion in June 2021 — the highest level for at least 10 years, according to the latest Preqin data.
“Due to uncertainty over exiting, we slowed our pace of investment in the second half of last year,” Ming Liao, founding partner of Beijingbased Prospect Avenue Capital, said in Mandarin, according to a CNBC translation.
The firm managed $500 million as of the summer and had previously expected to list some of its invested companies in the U.last year.
“Practically speaking, the U.is the best path of exit for Chinese internet and technology companies, Liao said.
“There’s high acceptance of new models and high tolerance for unprofitability, while liquidity is very good.
Last year’s average daily turnover for stocks in Hong Kong, a measure of liquidity, was about 5.4% of the Nasdaq and New York Stock Exchange in U., according to a renaissance report of China earlier this month.
Even for great Chinese companies such as Alibaba and JD.com, the average daily invoicing of his Hong Congred shares was between 20% and 30% of those marketed in New York.23 without displaying an implementation date.
The path to an IPO in Greater China or elsewhere remains uncertain, even if prices are cheap.
“(Chinese) companies applying to be listed overseas will likely have to await further clarification from regulators on both sides and can expect more rigorous scrutiny.
Regulatory clearance and prior approval from various agencies and authorities,” the analysts said.
"The new rules may impose long wait times for companies hoping to list overseas," the analysts said.
For Chinese IPOs in the US and make it difficult for Chinese companies to raise capital abroad.
After the high-profile suspension of Alibaba subsidiary Ant's planned IPOs in Hong Kong and Shanghai at the end of 2020, authorities also delayed the mainland listings of computer manufacturer Lenovo and Swiss seed company Syngenta last year.
More than 140 companies have filed active IPOs in Hong Kong, according to the Hong Kong Exchange website.
An EY report showed that the backlog of companies looking to go public in the mainland or Hong Kong remained above 960 at the end of 2021, little changed from June, before the last regulatory review.
At the end of the pre-IPO, 12 Chinese companies joined the list of new unicorns (private companies valued at US$1 billion or more) in the second half of last year, according to CB Insights.
In contrast, India added 26 unicorns and U. 148 unicorns during this period.
