TheChek News Flow

Rating agency voices concern as Beijing transitions from property-led growth model

Fitch Ratings cut its outlook on China’s long-term credit rating to negative on Wednesday, citing uncertain prospects for the economy as the country transitions from its property-led growth model.

The move by the rating agency, which maintained the country’s A plus credit rating, follows a similar outlook downgrade from rival Moody’s Ratings in December.

“The outlook revision reflects increasing risks to China’s public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model,” the agency said.

“Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective,” it added.

China’s finance ministry hit back at the downgrade. Fitch’s rating system “failed to effectively anticipate the positive role of fiscal policies in promoting economic growth”, the ministry said.

Beijing has been struggling to boost growth in the post-pandemic era. It is still dealing with multiple economic challenges such as a prolonged property crisis, high local government debt and falling direct foreign investment.

In recent months, Beijing has redirected resources to the manufacturing and high-tech sectors. It has also sought to curb the spending of indebted local governments traditionally reliant on land sales for revenues.

China has set an economic growth target of 5 per cent, the same as last year’s figure and the lowest in decades, but analysts believe it will be difficult to achieve without an increase in domestic consumption and revival of confidence.

Fitch forecast that China’s gross domestic product growth would slow to 4.5 per cent in 2024, citing persistent property sector weakness and subdued household consumption.

A growth target of 5 per cent is “in line with expectations, reality and the need for developments”, the ministry said. The economy’s “long-term positive fundamentals have not changed, and China’s ability and determination to maintain good sovereign credit have also not changed”.

Fitch also forecast that general government debt — which covers local and central government borrowing — would rise to 61.3 per cent of GDP in 2024, up from 56.1 per cent in 2023, primarily due to fiscal support to counter economic pressures.

The finance ministry said China’s debt was under control, while hidden debt — local government’s off-balance sheet liabilities — was also declining.

President Xi Jinping has launched a charm offensive to revive investor confidence in China, engaging in high-level meetings with foreign executives.

The outlook downgrade follows a week-long trip to China by US Treasury secretary Janet Yellen, who voiced concern about the potential impact of excess Chinese capacity on global trade.

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Treasurer Jim Chalmers warns economy is not ‘competitive enough as it stands’

Australia is set to overhaul its merger regime and increase scrutiny of takeovers that the government fears could reduce competition.

The move comes as politicians and regulators are focusing their attention on the country’s largest businesses in markets including retail, travel and banking, sectors largely dominated by a handful of companies.

The pressure has been most keenly felt in the supermarket sector, where some high-profile MPs have called for a potential break-up of the largest groups and the government is set to introduce new penalties on retailers that are found to have been acting anti-competitively with regard to pricing and the treatment of suppliers.

Jim Chalmers, Australia’s treasurer, said that the overhaul of merger rules was necessary as the economy is “not competitive enough as it stands”.

He described the regulatory process for approving mergers as “hit and miss”, with the Australian Competition and Consumer Commission only scrutinising a portion of takeovers each year.

Australia has been at the centre of a boom in takeover activity in recent years as the size and number of deals have grown significantly. Takeovers in sectors including mining and banking have tested regulatory appetite for consolidation.

There were 1,400 mergers in Australia last year, according to Chalmers, with a combined value of about A$300bn (US$200bn), but the regulator only scrutinises 330 on average a year. The proposed reforms include plans to speed up the merger process but also to introduce laws that require those above certain market thresholds, such as market share, to be notified to and passed by the ACCC.

The reform is designed to better equip the regulator to monitor deals that could have an impact on consumers and extend or entrench market power, Chalmers said. So-called serial acquisitions — in which a company rolls up smaller players over a period of time to the detriment of competition — will also be a focus of the revamped laws.

The Labor government led by Prime Minister Anthony Albanese has clashed with business in recent months over union-friendly industrial relations reforms and its review of the supermarket sector.

ade in Australia’ drive aims to shift economy from ‘world’s quarry’ label

Chalmers said that while most mergers brought economic benefits, better and more transparent rules were needed to stop deals that squeezed out competitors. The new laws, which will come into force in 2026, were welcomed by the regulator.

“Higher prices, less choice and less innovation can result from weakened competition,” Gina Cass-Gottlieb, chair of the ACCC, said in a statement. “Stronger merger laws are critical to ensure anti-competitive mergers do not proceed.”

Peter McDonald, a partner at law firm Allen & Overy, said reforms would increase the cost of completing mergers for larger companies and raise the risk of tougher regulatory intervention.

However, he added that international precedents had shown a more expanded regulatory system could work well. “While there will be a hot debate on the detail, and practical teething issues, I do not think the sky will fall,” he said. “I am confident we will end up with a sensible, well-functioning system.”

Investors at The Information’s Private Capital Conference Tuesday said the shakeout in valuations the past two years has given them more opportunities to find attractive deals—even in beaten-down sectors such as e-commerce.

But tech founders face higher hurdles to go public and many initial public offerings remain far off, even for most artificial intelligence companies. A cautious note pervaded much of the discussion, with memories of the most recent tech meltdown still fresh in many minds.

The Takeaway

• Fundraising remains strong at large funds

• IPOs are off-limits for smaller startups

• Investors see opportunities in decrease of startup valuations

Party Like It’s 2021…

Investors are bracing for the return of mega sovereign wealth investing. Asked about recent media reports of a potential new $40 billion fund coming out of Saudi Arabia, Spark Capital Managing Partner Jeremy Philips likened the feeling in the market to what it was in late 2021.

“The animal spirits that we see in the markets today, to me, are the most extreme that we’ve seen, including Q4 of 2021. And that’s already true. It’s not consistently true as it was in 2021, where it was true for everything, but it’s certainly true in pockets. I think an extra $40 billion dropped in is something that one would need to think carefully about, what the right way to play that is.”

…Unless You’re a Smaller Startup…

Despite the recent IPO of Astera Labs, which went public with nearly $116 million in revenue last year, investors were largely bearish on the public market prospects for relatively small companies.

“In the past, you could go public when you were at a $500 million market cap, you could go public with $50 million in revenue,” Philippe Laffont, Coatue Management founder and chief investment officer, said. “Today, we think that you can’t go public without a billion dollars in revenue and $10 billion in market cap. It’s really hard because public markets are more than ever dominated by indices, dominated by ETFs.”

…Or a Long-Term Investor

“I think in most areas the prices are reasonable,” said Anton Levy, co-president of General Atlantic, citing sectors such as enterprise software and e-commerce. “It’s a great environment to put new capital to work.” Similarly, Mubadala’s venture head, Ibrahim Ajami, said, “[We’re] moving into offense.”

Put Things in Perspective

“The biggest thing that I learned is that things are never as good as people think and never as bad as people fear,” said Imran Khan, founder and chief investment officer of Proem Asset Management, about his experience as an investor in neobank Dave. The company was privately valued at $2 billion and doubled its valuation in a special purpose acquisition company deal. As a listed company, Dave’s market value plunged to a low of $53 million, but it has since rebounded to $450 million.

Bankers Say ‘Growth’

“Investors are particularly focused on growth,” said Elizabeth Reed, global head of the equity syndicate desk at Goldman Sachs.

“Growth is extremely important,” said Lauren Garcia Belmonte, head of technology equity capital markets, Americas, at Morgan Stanley. “It will create success in the IPO markets.”

AI IPOs Are Mostly Far Off

“The majority of the companies that are truly pure-play AI focused are still mostly financing themselves in the private markets,” said Michael Harris, global head of capital markets at NYSE. “We have seen a handful of companies that are at least going through the process of speaking with us,” he added.

Don’t Be a YAC

Tony Kim, a managing director in fundamental equities at BlackRock, said he is sick of YACs—Yet Another Company. For Kim, who expects fewer than 20 tech IPOs this year, there are too many startups competing with each other in the same sectors.

“If you are in the same category [as your competitors], and you are smaller and you’re growing less, why should I care?” Kim said. “Are you a YAC?”

E-Commerce Comeback?

General Atlantic’s Levy said the negativity around e-commerce startups is overblown, which means you can find some attractive prices if you can figure out which firms have “real moats” and “real margins.”

“There’s so much negativity in and around e-commerce that some of the prices there are maybe borderline attractive,” Levy said.

Haves and Have-Nots of Fundraising

“Large funds with big brands are having no problem fundraising—it’s actually been an extraordinary time for them. It’s the emerging funds that are going to have a harder time,” said Jennifer Heller, president and chief investment officer at Brandywine Group Advisors.

Walmart Has Big Lead on Amazon in Grocery

Marc Lore, who has sold startups to both Walmart and Amazon, said Walmart’s vast footprint of retail stores will give it a long-term advantage in the battle between the two giants. The bricks-and-mortar retailer’s huge presence in the low-margin grocery business, Lore said, gives it room to draw in customers to whom it then can sell higher-margin goods, including through its website.

“Structurally, the long-term competitive advantage around groceries is really important,” said Lore, who was CEO of Walmart e-commerce from 2016 to 2021. “If I were still there, I would be pushing really hard to lean into that advantage.”

Some of the world’s biggest tech investors have a reality check for companies thinking about going public: While the initial public offering market is showing signs of life, smaller companies that made the cut during the last boom cycle don’t have a shot now.

“There were a lot of companies that went public in the last cycle when there was a lot of exuberance that were too small,” said Anton Levy, co-president of General Atlantic, speaking at The Information’s Private Capital Conference. “Any company that went public at less than a $1 billion market cap, with probably a few exceptions, is probably disappointed that they did,” he added. Levy said IPOs will remain “very selective” this year and the floodgates won’t open like they did two or three years ago.

The Takeaway

• Coatue’s Philippe Laffont says, “You can’t go public without $1 billion in revenue”

• Investors predict wave of private company M&A

• BlackRock executive predicts less than 20 IPOs by year end

Even with last month’s successful debuts by Reddit and Astera Labs, plus a flurry of IPO filings from companies including Ibotta and Rubrik, today’s market conditions remain more restrained than the IPO frenzy that peaked in late 2021. That year saw the public debut, through either IPOs or mergers with special purpose acquisition companies, of some well-known but relatively small firms, including Rent the Runway, BuzzFeed and Allbirds. Many of those companies are now struggling.

Philippe Laffont, chief investment officer of Coatue Management, echoed Levy’s sentiment. “In the past, you could go public with a $500 million market cap…[and] $50 million in revenue,” Laffont said. “Today, we think that you can’t go public without $1 billion in revenue, $10 billion in market cap.”

Tony Kim, managing director of fundamental equities at BlackRock, estimated that less than 20 tech firms will go public by the end of the year and thinks artificial intelligence companies in particular should be able to secure favorable valuations. But there haven’t been any dramatic changes in the IPO pipeline recently, he said, and investors such as mutual funds and exchange-traded funds aren’t interested in a company until its market value is at least $5 billion or $10 billion.

“Investment bankers, they would tell you that the markets are back and animal spirits are back. Some of them are positively inclined to that, because the environment seems a little bit more conducive, ” Kim said. “However, from my perspective, I don’t think anything has changed. It’s good companies at the right price.”

When asked about still-private firms that had landed billion-dollar-plus valuations, Kim said there is a large inventory of private companies and there will likely be a shakeout. “As a public investor, there is another threshold of relevancy,” Kim said. “If you are in the same category [as your competitors], and you are smaller and you’re growing less, why should I care [about you]?” he said.

The kinds of companies that two or three years ago would have been inundated with calls from advisers and bankers looking to help them go public aren’t getting the same number of calls now, said Jean Park, a partner at law firm Cooley. The current moment is better for larger companies, Park said.

“A $100 million, $200 million [annual recurring revenue] looks very different nowadays,” Park said. “The likelihood of that just being able to make it feels very different now than it did a couple years ago.”

A number of investors speaking onstage at the Private Capital Conference predicted a wave of consolidation in the private markets as companies put off going public. “There are going to be more mergers in the private market among companies,” Laffont said, though such deals can be difficult to pull together because “one founder needs to concede to another.”