Chinese internet firms court private capital

TutorGroup, Mogujie, Meilishuo and Tujia hope to raise $300 million to $500 million each from an expanding pool of investors looking to hit pre-IPO home runs.

A number of Chinese technology companies including online education service TutorGroup, online shopping sites Mogujie and Meilishuo.com and China’s version of Airbnb, Tujia.com are engaged in private fund-raising rounds, with each company seeking $300 million to $500 million, people familiar with the matter said.

The size of the pre-IPO funding rounds, expected to close in the second quarter, depend on investors' interest. Based on the targeted raise, each of the companies expects to be valued in excess of $1 billion.

In the past two years private capital has emerged as a distinct source of funding for tech companies that are not ready to list but need funds for growth.

“Tech companies are looking to capture market share and pursue high growth strategies and there is ample capital in the private market at attractive valuations which has led to the rush of private funding,” said Winston Cheng, head of technology, media and telecommunications for Asia Pacific at Bank of America Merrill Lynch.

A wider range of investors are now participating in such deals, including those that usually come in as cornerstone investors to IPOs. Alibaba's $25 billion IPO last year helped crystallise the kind of gains early investors can reap and whetted appetite for such deals, say bankers. Early Alibaba investors such as Japan's SoftBank and Silverlake are sitting on large post-IPO gains.

"We have seen a wider group of investors including sovereign wealth, traditional long-only fund managers as well as private equity and hedge funds participate in pre-IPO funding," said Ashok Pandit, head of sovereign wealth funds and institutional client coverage at Deutsche Bank. "Many are trying to capture the early gains to be reaped by investing pre-IPO situation," he added.

Multiple fund-raising

For young e-commerce companies, private capital offers attractive valuations and flexibility. Many are looking to capture market share and face margin pressure as they grow, and are not ready to face the scrutiny of public shareholders.

Private capital enables such companies to raise multiple rounds of financing within a short period of time. “We are seeing a significant number of companies looking at pre-IPO funding as a wider and deeper pool of investors are now looking at these transactions,” said Pandit.

For example, TutorGroup, which is the largest English-language learning institution in the world, in February last year raised nearly $100 million, with participation from Singapore investment company Temasek, Alibaba group and Qiming Venture Partners. A month later, SBI group, formerly known as Softbank Finance, joined as a strategic investor.

In April OlaCabs, India’s version of Uber, raised about $315 million from investors including money from Russian billionaire Yuri Milner’s DST Global. This marked its second round of funding in less than six months, with OlaCabs having raised $210 million from Japan’s SoftBank and other investors in October.

Consumption story

Many e-commerce and technology companies are riding a growing wave of consumption over the internet, as consumers are now shopping online. "This whole move to digital is becoming a more regular way of doing business," said Bob Partridge, Asia Pacific private equity leader at consultancy firm EY.

Given the fast growth in the tech sector, particularly for companies that are banking on Asia's consumption growth, it has become possible for companies to raise funds in large sizes. Smartphone company Xiaomi last year kicked off pre-IPO funding raising about $1 billion in private capital for a valuation of about $46 billion.

While China has been active, large-size deals have also emerged in India and Southeast Asia. In December last year Flipkart raised $700 million in private capital from investors including Qatar Investment Authority, T Rowe Price and DST Global.

In Southeast Asia, MatahariMall.com, the Lippo group's e-commerce arm has appointed Credit Suisse and Bank of America Merrill Lynch as placement agents for a round of private funding to raise $200 million.

While companies may not always need to hire advisers for pre-IPO funding, bankers expect next year to be a strong year for tech IPOs as some companies reach the stage where they are mature enough to tap the capital market.

"All the entrepreneurs in this market want to IPO. That's the aspiration. But to do so they need a success story," said EY's Partridge. "What pre-IPO financing does is it gets them capital to continue down that journey," he added.

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