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 mergers and acquisitions.

After a plunge in share prices wiped out more than US$3 trillion of market value in three weeks from mid-June, China suspended initial public offering 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 companies in China, tapping public markets was the cheapest way to raise capital after share indices more than doubled in the 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.

Mainland 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.

Tim Dattels, managing partner of private equity firm TPG Capital, said the sharp run-up in China's stocks had made it harder for private equity firms to strike deals, but circumstances were now more promising.