The downturn in the Shanghai and Shenzhen equity markets last summer sapped enthusiasm for many of the proposed buyouts last year of U.S.-listed companies from China, leaving them to pile up. None of the so-called go-private transactions have closed. Even before last year’s broader market sell-off, several buyout targets saw their shares slip below the proposed buyout price. Skeptics saw this as validation that these deals were too complex or too narrowly focused on valuation arbitrage.
There has since been a quiet revival of these deals, however. In March shareholders of Qihoo 360 Technology Co., a Beijing-based, New York Stock Exchange–listed provider of Internet security products, approved a nearly nine-month-old buyout offer worth approximately $9.3 billion. The size of the transaction, which is the largest Chinese go-private to date, is a sign that ample financing remains available. Another example is an offer to take private Beijing-based and NYSE-listed Autohome by a consortium that includes management after less than 18 months as a public company.
Clearly, for some companies, the benefits of a go-private transaction extend beyond a short-term boost to valuation. Cross-border investing programs between Hong Kong and mainland China, the development of domestic Chinese venture capital funds and a government program to support Internet-based companies, among other factors, are making China a more fertile fundraising environment for the country’s private enterprises, particularly in the tech sector. Other incentives to go private include a lower cost of capital, a more stable shareholder base and fewer risks of getting caught between conflicting Chinese and U.S. securities regulations.
A further attraction looms in the not-too-distant future: Market index provider MSCI will revisit its view on excluding China’s domestic equities from its emerging-markets index. Inclusion would increase foreign capital inflows into China and make it even easier for high-growth IPO candidates to raise capital domestically.
All of this suggests a maturing capital market in China and nurturing environment for entrepreneurs, undergirded by an established base of domestic investors, Western-trained bankers and venture capitalists setting up their own shops and a proliferation of start-up incubators.
The case for many go-private transactions is predicated in part on the ability to raise equity capital at a lower cost in China. Domestic Chinese investors may apply a lower risk premium to the shares of local companies, because they are more familiar with local market conditions. They have firsthand knowledge of local consumption patterns, regulatory risks and the availability of capital, among other factors.
The ability to go private and then relist in China is attractive for U.S.-listed Chinese companies whose home market competitors are raising equity capital at a lower cost through a Shanghai or Shenzhen listing. Equally important, Chinese companies may also be able to diversify their shareholder base by pursuing a domestic listing. Institutional investors from South Korea, Singapore, Hong Kong, Australia and Japan are taking advantage of China’s efforts to open its capital account. Although they represent for a small portion of the trading on China’s equity markets, these investors have showed steady interest, despite the volatility that erupted last year.
A diverse body of investors offers a chance at more stable, less costly equity funding. Their investing criteria will not necessarily overlap in ways that lead to coincident buying or selling. An Australian superannuation fund, for example, will match investment return expectations against a different set of liabilities than, say, a South Korean insurance firm.
Last, pursuing a home market listing is a way to avoid becoming collateral damage in conflicts between U.S. and Chinese regulatory regimes. The dispute between the two nations’ regulators a few years ago over document sharing underscored how companies can be caught between competing or conflicting demands of regulators in different markets. Political and regulatory issues of this nature can distract management, unsettle investors and, in some cases, lead to legal liability if a court in one jurisdiction sanctions a company for complying with rules in another jurisdiction.
Nonetheless, the merits of go-private transactions vary from case to case. For companies doing business in the U.S., a listing there can provide visibility that will help with sales and branding efforts, in addition to access to equity capital — especially if there are competitors with a U.S. listing. And there is still a reputational premium attached to the prestige of a U.S. listing that can help certain companies with customers and business partners outside of China.
But for those Chinese companies whose business is not helped by the visibility or reputational premium of a U.S. listing, they have an alternative in their home market. As China accelerates the approval process for initial public offerings and continues to open its markets to international capital, it is fast becoming a hospitable environment for homegrown entrepreneurs.
Fan Bao is chair and CEO of China Renaissance, a privately owned investment bank based in Beijing.
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