A new bourse planned for Beijing could be a potential alternative for up-and-coming Chinese technology firms that might consider going public via special purpose acquisition companies (SPACs), particularly as China places greater scrutiny on overseas listings in the sector, according to an influential trade group and market observers.
Unveiled by Chinese President Xi Jinping last week, the Beijing Stock Exchange is expected to carve out a group of innovative companies from the National Equities Exchange and Quotations (NEEQ) board, also known as the New Third Board. The initiative is part of China’s efforts to boost its domestic capital markets and expand financing access to small and medium-sized enterprises (SMEs), while reducing debt levels.
Chinese officials hope the new bourse, which would target SMEs, could ultimately become the preferred venue for initial public offerings of promising, early-stage tech firms and allow Chinese investors to benefit from the development of new home-grown tech titans.
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“There are many factors that affect the IPO decision-making when companies decide their listing venues and the options to go public,” said Estella Kuo, secretary of the Zhongguancun Listed Companies Association, a trade group representing more than 400 listed and unlisted companies in China, mostly based in Beijing.
“The Beijing Stock Exchange will give a good choice to them. Companies in Zhongguancun will definitely take advantage of this opportunity [along with SPACs].”
SPACs, also known as blank-cheque companies, have been one of the hottest fundraising trends in the past 18 months, with the investment vehicles on the lookout in particular for growth companies, such as electric-vehicle makers and emerging technology firms.
Through the end of August, SPACs raised US$122.1 billion globally, primarily in the United States, according to financial data provider Refinitiv.
The blank-cheque companies do not have an existing business. Instead, they are formed to amass financial war chests and make acquisitions within a specified time frame, usually 18 months to two years.
Singapore recently announced new listing reforms to allow SPACs to go public in the city state beginning this month. Hong Kong is separately exploring whether to adjust its listing rules to allow IPOs by the blank-cheque vehicles, but has not moved forward with a public consultation.
The investment vehicles have remained popular among Asian sponsors and target companies despite a recent slowdown in the pace of fundraising following a torrid first quarter when a staggering US$95 billion was raised in just three months.
In April, the US Securities and Exchange Commission (SEC) raised questions about the accounting for stock warrants common to the deals, splashing cold water on financing for the vehicles. A SEC investor advisory group on Thursday recommended the regulator adopt increased disclosure rules for blank-cheque company listings.
Investors, particularly those providing private investment in public equity (PIPE) financing to complete acquisitions, have become more selective about potential deals as the market tries to digest the sheer amount of capital raised.
And, China Securities Regulatory Commission chairman Yi Huiman warned last week that SPACs and other non-traditional listing models, such as direct listings, are posing disruptive challenges to traditional IPOs and creating issues for regulators.
“Some believe that these non-traditional models are in essence virtualising IPOs, thus giving rise to regulatory issues around corporate governance, information disclosure and investor protection,” Yi said in a speech at the World Federation of Exchanges annual meeting last Monday. “We are closely watching the development. Are these new models suitable for all markets alike? This probably requires further in-depth study.”
At the same time, the crackdown this summer on the country’s tech sector has weighed on overseas listings, with Beijing requiring greater scrutiny of listings by companies that hold the personal data of 1 million or more Chinese people.
As a result, the appetite for SPACs to acquire Chinese companies remains low, particularly while tech firms are in the crosshairs for potential regulatory action, according to Peter Kuo, the CEO of PTK Acquisition Corporation, a SPAC that agreed to buy Israel’s Valens Semiconductors in May.
“People are taking a breather on it,” he said.
Marcia Ellis, global chair of the private equity group at law firm Morrison & Foerster, said a sponsor she recently spoke with is not considering Chinese targets right now “because there is too much uncertainty”.
“A lot of that is uncertainty that might be clarified in the next six months,” Ellis said. “After things are clarified on a couple of fronts, on the US and the China sides, I think Chinese targets will again be attractive.”
The acquisition of doughnut-and-coffee chain Tim Hortons China by a US-listed SPAC is one of the few deals to be announced involving a Chinese company since the crackdown. As part of the deal, Tims, as it is known in the mainland, agreed to transfer the control and possession of its China customers’ data to a new, locally owned company onshore before its Nasdaq listing to appease Chinese regulators.
One big question for the new Beijing bourse – its attractiveness as an alternative listing venue – will be whether it can garner significant liquidity, as the New Third Board has struggled to do in the past.
“Personally, I’m a little bit sceptical about whether the announcement has been coupled with a more comprehensive analysis of what it takes to get a meaningful market up and running,” Kuo said. “When you think about the logistics, the trading infrastructure and the quality of companies, I don’t think the government in the past has thought through a lot of the issues that need to be addressed to get a robust stock market to attract both solid companies and investors.”
Another issue that will need to be addressed is the lengthy timetable it often takes for companies to list in the mainland, according to sponsors.
“One of the advantages of the SPAC route is speed,” said Jonathan Lin, who also serves as CEO of Magnum Opus Acquisition, a Hong Kong-based SPAC that agreed to buy the publisher of Forbes in August. “With listings in China, we will need to learn more on the new regulatory framework on whether listings can be expedited while providing the necessary transparency for stakeholders.”