Investing in Chinese internet giant Alibaba may present a challenge for anyone wanting a slice of what is set to become one of the most valuable traded companies.
The Chinese government has greenlighted the sale the web shopping platform that has an 80% market share in the world’s most populous country.
But the business set-up is unlike most investors will have come across anywhere else.
Alibaba will come under the control of a ‘variable interest entity’ due to Chinese restrictions on foreign ownership of companies.
A variable business entity or VIE is a company that is managed by an offshore company in a financial jurisdiction like the Cayman Islands, where other internet platforms like Baidu and Sina are based.
Instead of shares in a Chinese company, investors buy into the offshore entity.
The profits go to the VIE and investors can trade their shares and pick up dividends in the same way as direct investment into Alibaba.
Many investors will be uncomfortable with the set up because they are a step removed from their investment.
Documents filed with US regulators clearly state Alibaba’s licences for online trading are owned by Chinese nationals to meet the no foreign ownership rules, but the VIE will give shareholders ‘effective control’ of the company.
Worryingly, the filing also notes that Chinese regulators may rule the arrangement is not legal.
However, the government stepping in at any stage is unlikely because of the impact such a step will have on the company and future floats.
But the Chinese government sees the arrangement as a way to give a nod to capitalism without going all the way.
Dominant market share
The lure of Alibaba’s dominant status in China may prove too much for wary investors.
Alibaba comes with Taobao and TMall, which have huge turnovers from Chinese online shoppers.
Their internet spend is predicted to triple over the next two years – and Alibaba is planning to add banking and subscription entertainment services to the stable of web sites with some of the cash raised from the float.
Analysts believe Alibaba will leave other internet floats like the $16 billion raised by Facebook floundering in its wake.
The scramble for shares is expected to value the company somewhere between $150 billion and $200 billion and launch Alibaba into the stratosphere of the world’s most traded and valuable companies.
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