The stellar performance of a spate of initial public offerings (IPOs) in the US and Hong Kong has spurred investor interest in privately-held late-stage companies bound for public markets.
“We’ve done a lot of analysis on different stages of companies, and where you can maximise your return versus risk. And generally, you can get great returns for a relatively low level of risk when you’re investing in the pre-IPO stage,” Xen Capital’s CEO Katrina Cokeng tells DealStreetAsia.
“It’s getting harder and harder to generate alpha. There’s a ton of liquidity in the markets. And in order to get alpha, people now have to go [into an] earlier stage before companies IPO, in order to get that alpha, that pop.”
The market is witnessing growing demand from institutional investors. “Not just your typical late-stage funds, but also sovereign wealth funds, private equity funds and also hedge funds,” Cokeng adds.
Indeed, institutional investors were said to be scooping up shares in Kuaishou Technology, before the short video app’s initial public offering on the Hong Kong stock exchange.
Shares were reportedly transacting in the grey market at more than double its IPO price. When it finally made a debut in the market early in February as the world’s biggest tech listing since Uber, shares leapt three times more than the issue price.
Meanwhile, shares in Sea Group, which gives investors exposure to e-commerce in the lucrative Southeast Asian market, have continued to rally after a rocky start. It listed in 2017 on the New York Stock Exchange at $15 a piece, but now trades at 18 times’ the original amount – most of the gain happened in 2020 amid the pandemic-driven online boom.
Xen Capital, which Cokeng co-founded in 2018, is an investment platform that earlier connected family offices and high net worth individuals in Asia to opportunities in the more mature markets of the US and Europe.
However, investor interest has since been redirected to opportunities in Asia, particularly China. “For us, the two themes that we’re really focused on this year – one is China and the other is the pre-IPO stage companies,” Cokeng says.
“We play quite actively the pre-IPO space, looking at late-stage companies over a billion dollars [in valuation] about two to three years away from IPO.”
Cokeng added that interest in the secondary shares of Southeast Asian companies has also picked up markedly in the last six months, when compared to a year ago.
A clutch of tech unicorns in Southeast Asia is gearing up to make their stock market debuts.
While Grab and Traveloka have reportedly have lined up bankers for IPOs, Gojek and Tokopedia are said to be finalising the details of a merger before a dual listing in Indonesia and the US.
However, it’s not just tech businesses alone that have the capacity to do well, said Cokeng, referring to the Chinese market in particular.
“China, relative to the rest of the world, is doing very well. You see a lot of the returns driven not just by technology but also by just general consumer businesses, let’s not forget that. One of the biggest IPOs last year was a bottled water company.”
In September 2020, shares in Chinese bottled water producer Nongfu Spring ended their first day on the Hong Kong stock exchange more than 50% higher than the issue price. The stock has continued to do well; it is now trading some three times’ higher than the IPO price, propelling the net worth of its founder Zhong Shanshan past Warren Buffett’s early this year.
Cokeng also expects that investors’ allocations to the public markets, versus private funds, will continue this year.
“With equity markets booming and just the lack of certainty in terms of how things will pan out with a pandemic and vaccine, people – and I’m talking about HNW investors and family offices in particular – are probably less willing to commit to a 10-year lock up type of fund. And so, the appetite is really more in [investments such as] pre-IPOs – they tend to be shorter dated, three years to exit – and also open-ended type of funds.”
“I think in 2021, in line with what happened in 2020, we’re seeing a bifurcation in terms of what’s happening in capital markets, versus economic reality,” she adds.
“Anyone with capital, with liquidity, with money, can certainly make outsized returns by investing well in the public market, which I think will continue to do well this year, given all the fiscal and monetary stimulus.”