William Rosenstadt is a partner and co-founder of Ortoli Rosenstadt LLP, and head of the firm’s capital markets and securities practice.
For the past three years, the trade war between the U.S. and China has placed economic stress on the two economic powerhouse countries. However, the trade pact that the two countries reached in January 2020 seemed to alleviate some of that pressure and even hinted that economic and political tensions might be on a path toward mending.
Then entered the coronavirus.
The virus itself seemed to ignite old tensions and add to the global stress that only a pandemic can cause. As always, any tension between the countries can leave business operations with a level of vulnerability. Surprisingly, that is not the case when it comes to the effects that we’ve seen on our Chinese IPO businesses.
Coronavirus And Ongoing Tensions
The Trump administration has accused China of failing to control the virus and a laundry list of other desecrations, including espionage and human rights violations. President Trump has barred 11 more China-based companies from being able to purchase American technology. There are ongoing tensions about security in Hong Kong and territorial concerns in the South China Sea. To put it mildly, the countries are back at odds, which is always a concern for global business.
The Standing Trade Agreement
However, despite an uptick in tension, one thing has remained: The original trade agreement is still in place. President Trump has not threatened to impose additional tariffs or any other punishments for exportations. As of right now, both sides have avoided threatening tossing out the agreement. In fact, trade has seemingly brought a level of stability where both countries appear to understand the benefit of working together.
Impacts On Business
In the current global political climate, we expected stiff headwinds when it comes to Chinese companies seeking access to the U.S. capital markets. However, it seems that perhaps the goodwill of the trade agreement has bolstered the interest in continuing to do business together. From a legal perspective, we still see the secure connection between the countries as they work together to successfully conduct business exchanges.
To date, we have been pleasantly surprised by the continued interest of both Chinese companies and the U.S. exchanges. Of course, this landscape could change at a moment’s notice, but currently, our Chinese IPO businesses are as active as ever, and we see no end in sight.
Our clients are SMEs and require significantly less capital than the large or mega-cap issuers exploring U.S. market opportunities. As a result, our sector of the Chinese issuers seems to be able to attract multiple bankers willing to underwrite their offerings.
Meeting Due Diligence
That being said, there is still an expectation for the issuer to assist in bringing a portion of the capital to the table from its network of investors. Still, assuming that is possible, we have not witnessed a shortage of U.S. investors interested in these types of transactions.
Further, because the global tensions are well-known by those business owners interested in a U.S. IPO, the issuers that approach us have worked hard or are willing to implement the necessary steps to make their businesses attractive to U.S. investors. Typically, we see the following attributes met:
1. A positive cash-flow
2. Has a western component to its management teams
3. Is willing to have a PCAOB auditor
4. Has a western element to its business plan either through expansion or a merger/acquisition
While these may be tall orders for some companies, they are the necessary safeguards due to the volatility of politics and the impacts that could have on processes in the future. Companies that are most serious are more than happy to make the required concessions.
What To Expect
It’s never a simple quest to predict how IPOs will fair in the market. While the political climate can certainly play a key role, as of right now, we are seeing that there is ongoing interest in working together, and that is certainly a win that we can get behind. Right now, there is interest from U.S. investors and Chinese issuers willing to do the groundwork to make business as attractive as possible even during times of uncertainty. While we can’t speak for what may happen in the future, all signs point toward a strong working relationship.