Xiaomi to be the first target of China’s unicorn funds, giving mainland investors a taste of marquee IPOs

Six of the first funds will have a combined war chest of 300 billion yuan, more than the sum total of every A-share IPO last year, enough for them to act as cornerstone investors in the biggest blockbuster stock offers

PUBLISHED : Thursday, 07 June, 2018, 8:03am
UPDATED : Thursday, 07 June, 2018, 10:41pm

Xiaomi, which is seeking to raise up to US$10 billion in a Hong Kong stock offer, will be the first to sell Chinese depository receipts, part of a government effort to let mainland investors partake in the growth among China’s marquee technology companies, according to three people familiar with the plan.

The depository receipts will be held in escrow by the Bank of China, serving as the custodian bank, the people said, declining to be named for discussing a matter that hasn’t been announced. Investors domiciled in mainland China will be able to invest in Xiaomi’s CDRs through six mutual funds specially created to hunt for so-called unicorns - start-ups valued at more than US$1 billion, like Xiaomi - in the new economy.

The CDRs form the final missing pieces in a complex fundraising plan for Xiaomi, which took just eight years to grow from an industry upstart to the world’s fourth-largest smartphone maker by shipments. The company will go on a roadshow by the end of June to persuade US and European institutional investors to value its entire business at no less than US$70 billion.

To help the marquee tech companies raise funds, China’s securities watchdog agency issued a set of rules to regulate the issuance, trading and information disclosure by CDRs. The regulator would manage the scale of fundraising by controlling the number of companies eligible to issue CDRs, as well as their timing and pace of issuance.

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Stock market executives from New York to Singapore had been wooing the company for months to persuade Xiaomi to raise funds on their bourses, in a race for the title of the global fundraising capital.

Nowhere was the competition fiercer than between Hong Kong, Shanghai and Shenzhen. Hong Kong’s stock market operator and securities regulator last year pushed through the biggest reforms in the city’s listing regulations in decades to let so-called variable interest entities (VIEs), or companies with multiple classes of stocks, such as Xiaomi, to raise funds.

China’s securities regulator showed that it too can bend rules and fast track listing approvals in a fortnight for technology companies, instead of the usual two-year queue.

The regulator also floated the idea of creating CDRs for local investors to trade Xiaomi, as well as marquee technology companies that are already listed offshore, such as China Mobile, Baidu and this newspaper’s owner Alibaba Group Holdings. Yunfeng Capital Management, the US$1.1 billion private equity fund of Alibaba’s chairman Jack Ma Yun, is a Xiaomi investor.

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That put Beijing-based Xiaomi in a dilemma, torn between the entreaties of its home-market watchdog and its aspiration to be a global company.

A compromise may have been found, as Xiaomi’s listing plan was vetted and passed by the Hong Kong stock market’s Listing Committee, getting the formal green light by the regulator to raise capital, according to a source close to the Securities and Futures Commission.

Up to 70 per cent of Xiaomi’s US$10 billion initial public offer (IPO) will be raised in Hong Kong, with the balance 30 per cent raised through CDRs, Reuters reported this week, citing unidentified people familiar with the matter.

Some of the missing details were announced overnight, with the establishment of six unicorn funds authorised to become strategic investors in technology IPOs, according to a statement published on the China Securities Regulatory Commission’s website.

Each of the funds will be capped at 500,000 yuan per investor, each with a lock-up period of three years. The funds will charge less than 0.1 per cent in annual management fee, and less than 0.03 per cent in custodian fee, significantly less than ordinary fund products.

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The six funds will be managed by China Southern Asset Management, China AMC, E Fund, Harvest Fund, China Universal Asset Management, and China Merchants Fund, according to the regulator.

They can each raise at least 5 billion yuan, but no more than 50 billion yuan, giving them a combined war chest of 300 billion yuan (US$47 billion) available to act as anchor investors in the CDRs. Last year, all initial public offering deals in China’s A-share market raised 217.2 billion yuan in total, according to the Securities Daily newspaper.

The funds will be distributed through six banks: Industrial Bank of China, Bank of China, China Construction Bank, Agriculture Bank of China, Bank of Communications, and China Merchants Bank. Five of these six banks - except Bank of Communications - were invited this week to help Xiaomi’s Hong Kong IPO, Bloomberg reported separately.

The funds will be authorised to commence their roll-out within a week, and must complete their subscriptions within six months, the regulator said.

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The regulator said they must follow all trading rules and conduct themselves properly to protect the interest of investors.

“There should not be any misleading marketing, or false disclosure, that may hurt the interest of investors,” said the CSRC.