Equity Funds’ Hunt for ‘Unicorns’ Comes Up Empty
The six fledgling equity funds that the government has designated to invest in Chinese “unicorn” stocks are ready to spend their billions of dollars — but there is no stock to buy.
The large closed-end equity investment funds have all competed the regulatory clearance process and are expected to announce their launch Saturday, Caixin learned.
The news comes nearly three weeks since the funds completed their fundraising, which fell short of the original goals.
The fund were established to invest in Chinese depositary receipts (CDRs), a new type of security that allows overseas-listed Chinese companies to list on the mainland markets, as well as the initial public offerings (IPOs) of new tech companies that fit the government’s call to encourage listing of high-tech companies and innovative startups. The funds were allowed to raise as much as 300 billion yuan ($45 billion) in total.
However, the first batch of tech-company unicorns — startups with a value of at least $1 billion — that were expected to issue CDRs have pushed back their plans because they could not reach agreements with the China Securities Regulatory Commission (CSRC) on their respective issuing prices.
Smartphone-maker Xiaomi Inc. initially planned to offer CDRs at the same time as its Hong Kong IPO, but then announced two weeks ago that it had decided to postpone the issuance.
Caixin has learned from industry sources that Alibaba Group Holding Ltd. and JD.com Inc. have also pushed back their timelines for issuing their respective CDRs.
Baidu Inc., which was expected to be the first firm to issue CDRs after Xiaomi shelved its own issuance plans, has not made any new moves since racing to prepare its application, a person close to the company told Caixin. Another potential issuer, NetEase Inc., has also become less enthusiastic about CDRs, Caixin learned.
Even before Xiaomi announced the delay in issuing its CDRs, the CSRC lowered the cap that retail investors are allowed to contribute to the funds to 20 billion yuan, down from as much as 50 billion yuan the regulator previously approved.
The CSRC’s move comes amid growing concerns about the effect the CDR funds could have on the market. Some participants told Caixin they believe that 300 billion yuan is too much for the market to digest, and could suck liquidity out of existing fund products as investors withdraw money to allocate to the new CDR funds.
As of June 19, the six funds had raised a total of about 70 billion yuan from private investors. It’s unclear how much capital that institutional investors have placed in the funds. Meanwhile, there was speculation that the securities regulator might not proceed with the CDR program if China’s benchmark stock index were to drop below 3,000 points.
An escalating trade war between U.S. and China has kept the Shanghai Composite Index under the 3,000-point mark since June 19. The benchmark closed at 2747.23 Friday.
When asked about the progress in the CDR program at a news briefing Friday, CSRC spokesman Chang Depeng said the regulator had no comment on market speculation.
Now with the uncertain timelines for CDR issuance, the funds have no choice but to keep their billions of dollars in bank escrow accounts because market participants see very few targets for the funds to invest in.
According to their contracts, the six funds are also allowed to invest in domestically listed shares, government bonds, AAA-rated bonds, nonfinancial firms and bank loans.
Currently there are no signs of new IPOs by new-economy companies, and IPOs by regular companies are too small to need strategic allocation, so the funds might end up with closed-end bond funds, a market participant told Caixin.
The funds might also turn to the Hong Kong Stock Exchange through the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs, which allow Hong Kong and mainland investors to trade securities in each other’s markets.
The Hong Kong market has more unicorn stocks, which might provide some options for the funds, a person close to the regulator told Caixin.
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