Growing Geopolitical Concerns Weigh on Chinese IPOs and M&A
Growing geopolitical concerns from the trade tensions between the US and China are compounding an already-cautious outlook among investors on pre-listing activities and mergers and acquisitions (M&A) involving Chinese firms.
Pictet Asset Management, for one, in November projected a renaissance in the number of initial public offerings (IPOs) from Asia this year, spurred mainly by China. But the tit-for-tat trade war between the world’s two largest economies has doused that optimism somewhat.
Uncertainty Around Trade Policies
Jon Withaar, who manages around $1 billion as head of Asian special situations at Pictet, said that the outlook for domestic Chinese IPOs is less optimistic now than a few months ago, as geopolitics are reigning in earlier hopes for a rebound in listings.
"Uncertainty around trade policies has given buyers pause for thought," he told The Business Times. "We expect state-owned enterprise-related restructurings to continue."
Valuations have fallen while "the broader market is taking a wait-and-see approach to trade policy for the moment," he added.
Special Situations Strategy
Special situations strategy refers to the investment approach driven around catalysts that include pre-announced or speculative M&As, investments in unlisted securities, asset sales, and restructures, to leveraged buyouts. It’s one that is used by Pictet, which counts $282 billion in assets under management as of June 30, 2024.
Chinese Equities
Chinese equities have suffered in the past three years as the world’s second-biggest economy logged disappointing growth while taking a hit from a persistent property slump, following a longer Covid-19 lockdown than most countries.
Uncertainty of Exit
Another expert pointed out that the trade war isn’t the only factor crimping deal activity involving Chinese companies.
"While tariffs would impact valuations, it appears that investors continue to remain cautious of Chinese companies, with the key reason being the uncertainty of an exit," said Leon Lim, partner at TSMP Law. He added that the cautious mood is likely to persist for all of this year, until Beijing sends a clear signal of its support for capital markets and businesses.
Private Equity Investors
Private equity investors continue to hold a cautious view of Chinese companies due mainly to the uncertainty of exits, Leon Lim pointed out.
PE Exits
A December report by Dealogic showed that among the 10 biggest private equity (PE) companies with operations in China, there is no record of any having listed a Chinese company or fully sold their stake through an M&A deal last year – the first time in at least a decade.
The pace of PE exits has slowed since Beijing slapped curbs on Chinese companies’ ability to list in 2021. This is limiting the options for buyout groups, which rely on the ability to sell or list companies – usually within three to five years of buying them – to generate returns for the pension funds, insurance companies, and others whose money they manage.
Hong Kong Listings
But it’s not all doom and gloom for Chinese IPOs. Given Beijing’s clampdown on domestic listings, market experts expect to see more profitable Chinese companies seeking to list offshore, notably in Hong Kong.
Recent Chinese Consumer IPOs
Recent Chinese consumer listings have done particularly well, noted Jun Qian, head of PE China at Schroders Capital, which manages $97 billion worth of assets.
"Recent positive debuts of Chinese IPOs in Hong Kong have whetted PE investors’ appetite for pre-listing opportunities of ‘solid’ companies," he said.
Conclusion
In conclusion, the growing geopolitical concerns and trade tensions between the US and China are casting a shadow over the outlook for Chinese IPOs and M&A, leading to a cautious approach from investors. While there are some positives, such as the potential for more listings in Hong Kong, the overall sentiment remains cautious.
FAQs
Q: What is the impact of the trade war on Chinese IPOs and M&A?
A: The trade war is leading to a cautious approach from investors, with valuations falling and a wait-and-see approach to trade policy.
Q: What is the outlook for Chinese equities?
A: Chinese equities have suffered in the past three years due to disappointing growth and a persistent property slump.
Q: What is the impact of the uncertainty of exit on private equity investors?
A: Private equity investors are holding a cautious view of Chinese companies due to the uncertainty of exits.
Q: Will we see more listings in Hong Kong?
A: Yes, market experts expect to see more profitable Chinese companies seeking to list offshore, notably in Hong Kong.
