U.S. Dollar Dominance | IPO Window Closing Again | A New Way To Cash Out?

Here are three stories that caught our eye this week:

1) Challenging U.S. Dollar Dominance

Rivalries breed competition.

China is considered the U.S.’s top rival. Economically and politically.

Many believe China will usurp the U.S. as the #1 global economic power.

Some claim it’s already happened based on certain factors.

But we’re a little more skeptical than the U.S. doomsayers.

To start, we mentioned China’s youth unemployment is between 25-40%. That isn’t good no matter which way you slice it.

We also saw one of China’s biggest real estate developers, Evergrande — which had over $300 billion in liabilities — go bankrupt.

Another concerning data point are affluent Chinese citizens illegally transferring their currency into other safe-havens — including the U.S. dollar.

From Bloomberg (emphasis added):

“Imagine trusting your life savings to a group of strangers you know only via WhatsApp. Some affluent Chinese people are willing to make that gamble to get part of their wealth out of the mainland. Take 32-year-old Phoebe, who recently moved almost a million yuan ($137,000). To do it, she first had to transfer her money into the account of a local facilitator. Then, Phoebe, who requested to be identified by only her first name because of privacy and legal concerns, had to sit tight.

A few tense hours later, transactions began to pop piecemeal into a separate account she holds in Hong Kong. While the city has been stripped of many of the political freedoms it used to enjoy, it still occupies a unique place in China’s financial ecosystem as the only area with unfettered access to global capital markets. Once cash is there, it can go anywhere.

The funds that appeared in Phoebe’s account came from 10 people in total—one of whom deposited the equivalent of $1,300 in notes via an ATM. The transaction moved through an informal, unregulated system known around the world as hawala. On one side of the administrative border between the mainland and Hong Kong, Phoebe handed over her money to members of her facilitator’s network; on the other side, the transaction was mirrored by others in the network who dropped money into her account. The entire operation was dependent on faith. But Phoebe’s wait wasn’t quite as nerve-jangling as you might expect: She’d been referred to the remittance agency—which is illegal in China—by her established, well-­regarded wealth manager introduced via mutual connections...

There’s no reliable estimate on how big the industry is, but probes disclosed by authorities suggest an enormous scale. One investigation in China’s western Gansu province uncovered an operation with 75.6 billion yuan in assets, state media reported in 2021, citing China’s State Administration of Foreign Exchange. The money was spread among a network of five organizations that used more than 8,000 bank accounts across more than 20 provinces…

Even if moving money out of China becomes more difficult, experts don’t foresee any letup in overall attempts. Based on unexplained discrepancies in tourist data—which suggest Chinese tourists are leaving cash abroad when they travel—as much as $150 billion is expected to exit this year, according to an estimate from Gary Ng, a senior economist at French investment bank Natixis.”

Chinese citizens looking to exchange out of the yuan are capped at $50,000 per year.

The consequences of being caught are life-sentences. Although that rarely happens.

More from Bloomberg:

“People caught using illegal currency-­exchange services in mainland China usually are fined 30% or more of the amount of money they attempted to transfer. If the sum is significant, those providing the service face significant jail time. Although the maximum penalty of a life sentence is typically handed down only when there are compounding offenses such as bribery, reports of sentences ranging from one to five years are common.”

Imagine this happening in the U.S.

Imagine receiving a life sentence for exchanging your money out of the U.S. dollar. Imagine risking it all to exchange currency from a government known to make people disappear.

Why would affluent Chinese citizens go to these lengths to get out of the yuan if the yuan is on the verge of usurping the U.S. dollar as the next reserve currency?

Does that exude confidence from countries around the globe who are looking for diversification?

We don’t think so.

Yes, the U.S. government and the Federal Reserve have made the U.S. dollar a riskier safe haven with the increasing debt loads and poor monetary policy decisions.

No, the Chinese yuan isn’t going to usurp the U.S. dollar as the next global reserve currency.

Not for a long time at least.

2) The IPO Window Is Closing Again

The door is closing once again.

Companies are rushing to go public before it’s too late.

Longtime readers know about the IPO window.

Companies go public via IPO in order to get liquidity for their private investors and the C-Suite looking to cash in.

The capital window — companies looking to raise money via debt or higher valuations — closed as the Federal Reserve started raising rates.

Which meant the IPO window was the only window left.

It opened this year as stocks rallied on the back of the A.I. narrative.

There have been several all-clear signs. We’ve talked about them here and here.

But that window is closing again.

The mega companies who went public recently aren’t doing so well.

Instacart is already down 41% from its IPO opening day high on September 19th.

ARM Holdings is below its IPO opening. And down 25% from its high.

Meanwhile, Birkenstock just had one of the worst opening day performances of a $1+ billion company in the last 10 years. From MSN (emphasis added):

“The initial public offering of German footwear company Birkenstock Holdings Ltd. marked one of the worst debuts for a billion-dollar deal of the last decade, according to Renaissance Capital.

Birkenstock ended its first day of trading down 12.9% and was down 21% by the end of the week, according to Bill Smith, founder and CEO of Renaissance, a provider of IPO exchange-traded funds and institutional research.

Of the 95 IPOs that have raised at least $1 billion in the past 10 years, only five have performed worse than Birkenstock on their first day of trade. The deal was the worst since AppLovin in April of 2021, which ended its first day of trade down 18.5%.”

Private companies are thinking twice about going public after looking at the performance of these companies.

Why go public if public shareholders are going to send your price lower? They won’t. Meaning they’ll stay private hoping to time the market better.

This is what’s going to contribute to more bankruptcies as both the capital and IPO window aren’t open.

3) A New Way To Cash Out?

Speaking of the IPO window closing… it looks like some private equity companies are getting creative.

From the Financial Times (emphasis added):

“Nordic private equity fund manager EQT Group is drawing up plans to hold private stock sales for its portfolio companies because public markets have proven unreliable to exit investments.

EQT chief executive Christian Sinding said private auctions among its 1,100 limited partners could provide a novel way for its backers to monetise their illiquid holdings without the need to sell shares in initial public offerings.

The preliminary plans have been driven by what Sinding described as “dysfunction” in the IPO markets, he told the Financial Times.

The comments come as the volumes of new offerings in Europe have slumped to their lowest level since the 2008 financial crisis and private equity firms have a harder time selling down their stakes in portfolio companies. …

In EQT’s plans, the firm would hire an investment bank to build a book of interested buyers and sellers of a single private investment, much like the process of hiring underwriters for a traditional IPO.

The underwriter would lead negotiations on pricing, but instead of soliciting investment from public market investors like hedge funds, mutual funds and other large institutional investors, they would focus on EQT’s existing investors. The private transaction would give investors in the private company the ability to sell shares, or simply hold them. Others would get the chance to buy.”

So, EQT is going to go through the whole IPO process — hire an investment bank, promote their holdings, and find interested buyers and sellers — but will sell their shares privately?

EQT wants liquidity. They don’t believe the traditional IPO process is the best way to get it.

So they’re creating a synthetic way to get that liquidity.

We’re not sure what benefit this has. EQT wants to avoid the IPO market for the reasons we mentioned above.

But they’re also going to find out that private investors will need to be compensated for higher risk now that the “risk-free” rate (U.S. Treasuries) are 5%+.

Guess we’ll find out what happens.

Good investing,

Lance