Relaxing over coffee in SecondMarket’s central Hong Kong office, David Berger, the company’s Asia head, ponders the striking change in Chinese entrepreneurs’ attitudes that has transformed his own company’s chances in the region.
Berger, surrounded by computer screens and desks waiting to be filled, is about to dash to the airport for a flight to Shanghai. SecondMarket, a trading venue for illiquid investments, including private equity stakes, is planning to open its first mainland China office in the first quarter of next year. The company is well known in the US, but had previously not considered expansion in Asia – particularly China – because local CEOs saw raising money through a glamorous public share offering as the ultimate goal.
"Two years ago, the opportunity wasn’t here for us in China," says Berger. "Most companies were racing towards IPO; until January last year the response from potential clients would be: ‘Interesting, but no thanks’. Today, these companies aspire to list on SecondMarket and see the platform as a viable alternative to a public listing."
That, at least, is the plan. Hordes of Western financial services providers have opened offices in Asia in the past few years, hoping to benefit from the region’s growth as their home markets stagnate.
SecondMarket’s success will rely in part on how correct Berger’s thesis is: are Chinese CEOs abandoning public listings in favour of private fundraising, and will private equity investors regularly trade these holdings?
In the eyes of Chinese entrepreneurs the glitter of the IPO as a golden reward for years of hard slog has faded. A slew of accounting scandals at overseas-listed Chinese companies has dented valuations for even untainted firms. As if to confirm the notion, Muddy Waters Research, the short-selling firm responsible for the much-publicized stock collapse of Toronto-listed Sino-Forest, recently put out a new piece on Chinese company Focus Media (see What’s behind the great China stock scandals? Euromoney Spetemeber 2011. Its shares fell 66% on intra-day trading just from the report’s accusations – no matter if they are proved right or not.
Not all public listings are equal. Rupert Mitchell, head of Asia Pacific equity syndicate at Citi, says laughingly: "Don’t write us off yet" when asked if the glory days of Hong Kong IPOs for Chinese companies are over. He makes what he sees as an important distinction.
"The only reason a lot of these companies list in the US is because they can’t list in Hong Kong," he says. "You need three years’ track record of profitability, for example, in Hong Kong; many Chinese companies in the technology and media space don’t have three years of positive cashflow, let alone profits."
China’s entrepreneurs are a sociable group, and the message from those who have gone public and been disappointed has spread fast. Visiting promoters encouraging Chinese companies to list overseas touted the benefits – prestige, capital, publicity – but not the downsides: increased public scrutiny; the tyranny of quarterly reporting; and the ignominy of becoming an orphan stock.
"These entrepreneurs want to build companies that last for generations; that means they need to focus on innovation and long-term growth, not quarterly numbers or the volatility in their stock caused by high-frequency traders," says Berger.
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"These entrepreneurs want to build companies that last for generations. They need to focus on innovation and long-term growth, not quarterly numbers or the volatility in their stock caused by high-frequency traders"
David Berger, SecondMarket |
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Berger keeps a file of cuttings of prominent Chinese chief executives speaking out against their peers’ former obsession with IPOs. It is a compelling collection: in April, three of China’s most famous entrepreneurs spoke publicly about their reservations on the rush to IPO that has seized the tech sector.
Reuters reported Robin Li, CEO of leading search engine Baidu, as saying at a company summit: "There will be a listing frenzy this year; a frenzy of Chinese internet companies wanting to list overseas. You must remember that listing is not a means to an end, it is only a means of business development."
In the same month, Forbes magazine reported Jack Ma, founder of online auction house Alibaba, as saying of the public listing process: "Who needs pressure from outsiders to expand at an unreasonable rate or to rush to profitability?"
Finally, the Oriental Morning Post reported on April 27 that Zhang Tao, CEO of social rating site Dianping, had that year shelved plans for an IPO in favour of raising funds in the private market.
The US’s Nasdaq OMX has been a favourite haunt of Chinese technology and media companies that do not manage a Hong Kong listing, but with short-sellers burrowing into the corporate governance of these companies and the entire sector underperforming US markets, it is no easy option. Not so, says Nelson Griggs, head of Asia Pacific for the exchange.
"Globally, all IPO pipelines have a backlog, but we have a good 40 or so Chinese companies that would like to go out in the US, of which the overwhelming majority are in [technology, media and telecoms]," he says. "It’s a good fit for us with the deep analyst base and good companies already here, but we are facing headwinds in getting investors comfortable with corporate governance."
Equity bankers in Hong Kong tend to agree with that prognosis, saying that the Hong Stock Exchange is unlikely to relax its stringent listing requirements and that therefore there will be room for competing overseas exchanges prepared to offer easier access to listing.
MEANWHILE, FOR PRIVATE EQUITY FUNDS SWARMING OVER China looking for the best investment targets, this change in CEO attitudes means there are more opportunities to examine. "Chinese companies wanted an IPO at all costs and they saw it as badge of honour to complete a listing," says Chris Fong, managing director at Welkin Capital in Hong Kong. "That’s less the case now. As a family office we are more interested in taking longer-term stakes in companies."
