Alibaba knows all investors aren’t equal as IPO demand grows5 min read . Updated: 13 Sep 2014, 01:19 AM IST
Heavy demand from the biggest mutual funds would give Alibaba the confidence to push for a higher price or to sell more shares
New York/Hong Kong: For Alibaba Group Holding Ltd., not every prospective investor is created equal.
After a week of investor meetings, the Chinese e-commerce giant has received enough interest in its initial public offering that it will stop taking orders for the sale early, people with knowledge of the matter said.
Before Alibaba’s advisers can decide whether they will boost the size of the IPO above a $21.1 billion target, they need to take a close look at where the orders are coming from. Because bids are still not binding and small funds looking to turn a quick profit know they won’t get everything they ask for, they often inflate their demand to get the largest possible allocation of shares.
Heavy demand from the biggest mutual funds, which take a long-term view and can place larger orders, would give Alibaba the confidence to push for a higher price or to sell more shares. Some of those fund managers have concerns about Alibaba’s governance structure and the political risks of investing in a Chinese company, and might lose interest if Alibaba boosts its valuation much higher, said Max Wolff, the New York-based chief economist at Manhattan Venture Partners.
“Institutional investors want to like the name but have some difficulty getting comfortable with it," said Wolff, who counts potential Alibaba investors as his clients. “It will make people uncomfortable at a higher valuation."
Alibaba and its backers are currently valuing the company at as much as $162.7 billion, which is conservative relative to its peers. At the top of the proposed price range of $60 to $66 a share, the company is asking about 29 times three analysts’ estimates for earnings in the year through March 2015.
Baidu Inc. and Tencent Holdings Ltd., the biggest Internet company in China by market value, trade at more than 35 times estimates of this year’s earnings. A similar valuation would imply a price of nearly $80 a share for Alibaba. Amazon.com Inc. fetches closer to 135 times forecast 2014 earnings.
“Initial price talk was attractive, and given all the buildup in anticipation, I thought perhaps they might try to do a higher price," said Eric Brock, a portfolio manager at Clough Capital Partners, which oversees more than $4.5 billion in assets including the Clough China Fund and owns shares of Tencent. “I think the price itself will be very well received."
Investors are also enamored with the market in which Alibaba operates. Chinese Internet users have grown to 632 million and could exceed 850 million by 2015, according to government data.
Representatives for Alibaba declined to comment.
Alibaba is in the middle of a global roadshow to meet investors in a combination of large events and one-on-one meetings. The smaller meetings are specifically aimed at answering queries from the big funds—from Fidelity Investments to BlackRock Inc., people with knowledge of the matter said.
Fidelity, BlackRock and T. Rowe Price Group Inc. declined to comment on their interest in Alibaba’s IPO, while a spokesman for Pacific Investment Management Co. didn’t immediately respond to messages seeking comment.
For US-based investors, final orders will need to be in by 4 pm on 16 September, while Alibaba will stop taking orders in Asia and Europe during their respective afternoons on 17 September, the people said, asking not to be identified discussing private information. Alibaba still plans to set a final price for the shares on 18 September, with trading to begin the next day, one of the people said.
The company has enough demand to sell all the stock at the high end of the offering range, the people said.
That said, Alibaba and its advisers may not want to risk pushing the price much higher. When Facebook Inc. boosted its IPO size and priced the shares at the top end of the higher range in 2012, it alienated large funds who were already concerned about the company’s growth. That left much of the stock in the hands of individual investors who rushed to sell their shares and it wasn’t until 15 months later that Facebook closed above its IPO price.
Some potential Alibaba investors say they walked away from the meetings with questions. For example, they want to know more about Alibaba’s relationship with Alipay, the Paypal-like business that was separated from Alibaba four years ago without the knowledge of shareholders Yahoo! Inc. and SoftBank Corp.
The move was made to put the business in the hands of Chinese nationals—including Alibaba founder Jack Ma—to avoid running afoul of restrictions on foreign ownership of financial services companies.
The company that controls Alipay, Small and Micro Financial Services Co., shares 37.5% of its profits with Alibaba, according to Alibaba’s filing, and fund managers want to be sure that they will continue to capitalize on the lucrative payments service.
Investors are also trying to get accustomed to Alibaba’s corporate governance structure, which gives 30 individuals the ability to nominate a majority of the board. Separately, investors would like a better sense of how Alibaba’s expansion will impact its future profit margins.
Mutual funds, sovereign wealth funds and pension funds can be heavily regulated, and require greater disclosure. Hedge funds, on the other hand, have the ability to buy and sell shares quickly, making it easier for them to profit from the momentum of a new listing.
“We are looking at a three- to five-year horizon," said Arnout van Rijn, chief investment officer in Hong Kong for fund manager Robeco, who helps oversee about $290 billion worldwide. “A hedge fund is going to be more nimble and may settle for a 20% return over a month. For us, we’re looking at where the stock will trade in five years’ time."
The roadshow will stop in San Francisco on Friday before reaching Hong Kong and London next week. Alibaba still plans to hold scheduled meetings even after the books are closed, and will allow investors it meets later to submit orders after the deadline, one of the people said.
In the end, Alibaba will have to balance the short-term interest of hedge funds, who may be willing to pay more for what could be the biggest IPO ever, with the more restrained aims and probing questions of fund managers.
“There’s just going to be some general aversion because Chinese companies don’t have the best history and this one is a little complex," said Jeff Papp, a senior analyst at Oberweis Asset Management Inc., which oversees $1.5 billion in Lisle, Illinois. He plans to attend the Chicago roadshow next week.
“I do think it’s cheap, and it’s the best asset we’ve seen. This situation, from a stock perspective is very favorable." Bloomberg
Jonathan Browning in Hong Kong and Belinda Cao in New York also contributed to this story.