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China IPO freeze opens door to alternative financiers

China’s move to halt new company listings on its stock markets is offering private equity firms, hedge funds and sovereign wealth funds an opening to fill private companies’ funding needs, paving the way for more merger and acquisition activity.

After a plunge in share prices wiped out more than $3 trillion of market value in three weeks from mid-June, China suspended IPOs to close the pipeline of new issues, which tend to suck money out of the market.

Companies on the verge of listing are now faced with the task of finding new means of financing to grow their businesses. The longer the freeze lasts, the more likely companies are to need funding from alternative, more costly financiers.

For private Chinese companies, tapping public markets was the cheapest way to raise capital after mainland share indexes more than doubled in the past year to mid-June, when the rally went abruptly into reverse.

To arrest the slide, regulators halted 28 IPOs earlier this month, and it is unclear when they will lift the ban.

We continue to be focused on buyouts and on growth investments

Chinese companies are not new to state intervention in IPO markets. A previous 15-month freeze ended as recently as December 2013 after 750 new offerings were blocked.

Bankers, private equity investors and wealth funds are now sniffing around for opportunities as companies face tight liquidity conditions.

In many economies, bank finance is the first port of call, but not in China. Beijing’s repeated efforts to cajole banks to lend to small and mid-sized enterprises has failed as China’s biggest lenders prefer providing credit to less risky state-owned enterprises.

Chinese companies raised $23 billion through stock market listings in the first-half 2015, according to Thomson Reuters data, and consultant EY had forecast a total of about 250 billion yuan ($40 billion) for the full year. That could leave a funding gap for alternative financiers of about $17 billion in the second half.

Dattels said his fund preferred healthcare, consumer, financials and technology sectors.

“We continue to be focused on buyouts and on growth investments in our core sectors,” he added.

Singapore state investor Temasek Holdings is also willing to bet on China despite the volatility. Temasek’s underlying China exposure stands at 27 per cent, second only to its Singapore exposure.

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