China’s IPO Freeze Open Doors to Private Equity


July 16, 2015


China’s stock market has made big headlines in all the right as well as the wrong reasons. While the country is trying to solve the problems by freezing new company initial public offerings, private equity and other alternative financing options have moved in to provide equity for companies.


Private Equity Firms Step In


China’s share prices saw a huge $3 trillion wipe-out of the market value and the authorities tried to control the entry of new companies. The hope for the official is that by stopping IPOs, the company can direct the flow of money a bit better.


But many companies that were previously on the verge of listing have to find alternative ways to finance their businesses in order to expand. This has opened up plenty of opportunities in China for private equity firms, hedge funds and other alternative financing routes.


Private equity firm funding has become a much more viable option for many companies in the Chinese market. Analysts said the bullish stock market run of the past few months had hit private equity firms hard, as it was harder to find deals. Now companies are more than willing to strike deals with the firms.


“We are dealing in a market now that is illiquid, nowhere to get listed and very little room to raise capital. We are going to see a more normalized role for private equity as a provider of capital for growth situation and illiquid situations,” said Tim Dettels, a managing partner of TGP Capital, in an interview with Reuters.


Filling the Funding Gap


In many other countries, banks are typically the first source of financing for firms, but in China banks are keeping away from many small and mid-sized companies. The country’s banks prefer to give money for less-risky ventures, such as the state-owned enterprises.


Private equity firms are much easier way to find funding in the current economic situation. One company that might need to look for alternative routes was Shenzhen Silver Bais Technology. The mold manufacturer had been planning for an IPO, but now has to look elsewhere for funding.


The company’s spokesperson said in a recent interview, “To a certain extent, the IPO freeze does affect the company’s original plans and arrangements, but it is also within our expectations”.


Increase Mergers and Acquisition Activity


On the other hand, the removal of listing option has influenced private equity firms already invested in companies. The freezing of IPOs removes it as an exit strategy option and thus there has also been an increase in mergers and acquisitions.


Mayooran Elalingam, head of M&A at Deutsche Bank’s Asia-Pacific sector, told in an interview with Reuters, the increase in mergers and acquisition isn’t concerning. The increase in alternative exit strategies “is good news for deal-making in China”, according to Elalingam.


Chinese companies are not experiencing IPO freeze for the first time. The previous freeze lasted for 15 months and took place in 2013. It’s likely that many private equity firms will enjoy the current situation and the opportunities for good deals is exciting for firms operating in the sector.

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