20 January 2019
Following a fund-raising frenzy, China's New third Board has suspended new listings of private equity and venture capital firms. Photo: Xinhua
Following a fund-raising frenzy, China's New third Board has suspended new listings of private equity and venture capital firms. Photo: Xinhua

Why a less overheated New Third Board will be good for China

During a business trip to Taiwan before the Lunar New Year holiday, I was sitting in a cafe one day when I overheard people talking about listing a Taiwanese firm on China’s New Third Board (NTB), or the OTC board. 

It’s interesting to know that the debate about the new Chinese stock board has spilled over to Taiwan. Market turmoil in the mainland hasn’t had any significant impact on the NTB’s development.

Over 1800 companies listed on the NTB in 2015, raising a combined 120 billion yuan. The amount is higher than money raised on the GEM board.

It’s worth noting that some mainland private-equity (PE) and venture capital (VC) firms have listed themselves on the OTC board, providing their investors another exit route.

So far there are 12 PE and VC companies listed on the NTB. The firms raised a total of 30 billion yuan.

Seeing the fever for PE and VC firms on the NTB, the listed PE/VCs soon started to issue new shares. Many have raised dozens of billion of yuan from new share issuances.

With such huge capital, I would have expected the fund managers to use the money for investments in small-sized private companies. Instead, many of them allocated a large part of the funds to Shanghai or Shenzhen-listed firms, aiming to profit in the short term.

The funds raised from the NTB have therefore flowed out indirectly.

Compared to the PE/VCs who can easily raise billions of yuan in the NTB via share issuances, the non-financial NTB listed companies would be very satisfied with 10 or 20 million yuan proceeds from similar efforts.

Meanwhile, among the top ten companies, in terms of market cap, seven are the fund houses. From a valuation perspective, those PE/VC giants have distorted the entire NTB market.

The above mentioned indirect outflow from the NTB is actually going against the purpose of the new board which is to fund startups and support real economy. Many technology firms on the NTB have started complaining about this.

Given the big-scale outflow from NTB, China’s securities regulator on Dec. 25 halted new listings of PEs on NTB, and plans to investigate the use of proceeds from the previous large scale financing activities by the listed PEs.

Frankly speaking, those fund managers had, to some extent, over-raised funds via NTB in the past year.

Now, with tighter restrictions on such activities, I believe small businesses will find more support from a healthier NTB.

This article appeared in the Hong Kong Economic Journal on Feb. 12.

Translation by Myssie You

[Chinese version 中文版]

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Director at Spring Capital

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