China’s recent crackdowns on overseas listings have thrown a wrench in the works of start-ups looking to go public, driving them to pursue investors in Asia’s rapidly growing private capital markets. JPMorgan Chase & Co estimates the fundraising amount in private capital markets for entrepreneurs in Asia surged to over US$240 billion last year from about US$100 billion in 2017, driven largely by Chinese firms. For years, the private market for stakes in the hottest companies in Silicon Valley has pumped ever-increasing sums into start-ups, and more recently, investors such as Blackstone and Temasek Holdings have swarmed toward China’s unicorns ahead of initial public offerings. Now, sectors such as education and consumer technology have fallen under Beijing’s steely gaze, throwing initial public offering (IPO) plans off course and sending cash-burning firms back to square one. “A higher number of companies will be considering private markets as a potential fundraising avenue,” said Selina Cheung, co-head of Asia equity capital markets and head of private financing markets for Asia-Pacific at UBS Group. “It’s getting more difficult to raise funds in the public market amid the regulatory headwinds and Sino-US tensions.” Could there be an exodus of Chinese tech stocks from US markets? Companies like ByteDance, which had been preparing for an IPO before the crackdown started, are not the only ones whose listing dreams are on hold. Last year’s global surge of listings has given way to a slump, as rising rates and market volatility cast a pall over high-growth companies. The situation is particularly acute in Hong Kong, which saw its worst January for IPOs in three years. Start-ups in Asia are hoping potential private backers will continue to focus on the opportunities for patient capital. “The private market provides a significant source of alpha for investors,” said Jonathan Paul, head of private capital markets for Asia-Pacific at JPMorgan. They would prefer investing in start-ups earlier in their life cycle at a lower valuation and secure a stake in the company before they go public, he added. US funds ignore China tiff to find yield for their trillion dollar problem The availability of private funds in Asia has grown phenomenally compared with a few years ago. “The whole spectrum has changed,” Shubhomoy Biswas, head of equity private placement for Asia ex-Japan at Nomura Holdings, said in an interview. “What was earlier largely limited to venture capital funds, is now seeing interest from a broader set of private equity funds, corporate investors, family offices and crossover investors.” Firms such as Blackstone, PAG and TPG have stepped up in doing more pre-IPO or growth-stage investments in Asia, according to UBS’ Cheung. Buyout firm PAG contributed the eyebrow-raising sum of about US$2.8 billion to Dalian Wanda Group’s commercial property management unit’s US$6 billion pre-IPO funding round in Hong Kong, people with knowledge of the matter said. Singapore state investor Temasek joined Genki Forest’s funding round last year, Bloomberg News reported in August. The Chinese beverage maker was valued before the investment at about US$15 billion, people familiar with the matter said at the time. Family offices and crossover investors are also keen to invest in pre-IPO rounds at a valuation discount to the expected public listing, JPMorgan’s Paul said. Why Xi Jinping’s trillion-yuan baby outgrew Asia’s growth markets “We’re getting reverse inquiries from investors asking for access to some of these companies which are looking to do an IPO down the road.” An early mover in the space, JPMorgan has had a special team for private capital markets for about six years and a dedicated Asia team for the past four. Nomura, UBS and wealth manager Julius Baer Group are also among those staffing up in private markets. Top 10 IPOs by China’s billion-dollar tech start-ups to watch for in 2021 Julius Baer set up a group to handle direct private investment about a year ago. It hired Giuseppe De Filippo, a veteran banker who worked at UBS for almost 15 years, to lead the initiative. The bank appointed Chong Liang-chee from HSBC to build the business in Asia. “Of all the large family offices and wealthy individuals globally, direct investments into properties or companies represent more than 30 per cent of their total asset allocation,” De Filippo, head of private investment markets at Julius Baer, said in an interview. Investing in private companies is an asset class in its own right, and the need for portfolio diversification will keep fuelling its growth, De Filippo said. For private investors, Beijing’s tech clampdown may have increased the supply of promising companies by keeping them off the bourses for longer. Driverless car start-up Pony.ai, which had previously explored a plan to go public, is weighing a new funding round to raise US$500 million to US$1 billion, to finance its expansion, Bloomberg News reported in August. The firm may have to rely on private funding for a few more years before it qualifies for an IPO in Hong Kong, a person familiar with the matter had said. JD Technology engages banks for up to US$2 billion Hong Kong IPO Venture capital’s appetite for China tech has shifted in line with perceived national priorities, with backers shunning some internet businesses and pivoting instead to subsectors such as semiconductors and robotics. ByteDance is making a bigger push into enterprise software, another favoured area. The consumer sector is also a beneficiary of the crackdown, with firms making everything from cosmetics to bubble tea raising funds to become the next domestic giants. Genki Forest, alcohol delivery company Jiuxiaoer and second-hand marketplace Zhuanzhuan are among those tapping private investors in recent months. While Chinese start-ups have been dominating the private fundraising universe, its counterparts in India and Southeast Asia are catching up. Indonesia’s GoTo Group raised more than US$1.3 billion in a pre-IPO funding round in November from investors including Abu Dhabi Investment Authority and Temasek. “Public markets used to be where investors invested their money routinely but there are more opportunities in the private markets now,” Julius Baer’s De Filippo said.