Set against a favorable backdrop of low interest rates, reduced volatility and increased risk tolerance among investors, 2014 started well for IPOs around the world. Activity in the largest markets returned to levels not seen since the tech boom at the start of the century. The value of IPOs globally almost doubled in the first quarter of 2014, according to Thomson Reuters.
This increase in activity was driven, in part, by private equity (PE) and venture capital (VC) firms as they, like many owners, sought exit strategies for their long-held assets via IPOs, a trend that has been building in recent years. In 2008, PE-backed companies accounted for just 6 percent of global IPOs, but this was up to 19 percent in 2013. These deals tended to be larger: PE-backed deals accounted for 35 percent of all proceeds raised in 2013, with 182 of them raising US$56.4 billion. Meanwhile, VC-backed IPOs around the world were also on the rise: according to Ernst & Young (EY), there were 127 deals in 2013, valued more than US$13 billion.
Offerings after an IPO have also done well. EY figures indicate that the global number of secondary offerings grew by 3 percent in Q1 2014 compared to Q1 2013. The total value of secondary offerings in Europe, the Middle East and Africa rose by 52 percent to US$46.27 billion over this period.
However, the second quarter of 2014 has seen some of that momentum reduced.
European issuers accounted for a combined 35 percent of global IPO volume in the first quarter of 2014, according to Thomson Reuters, up from 22 percent during the first quarter of 2013. European IPOs totaled US$16.3 billion during the first quarter of 2014, the strongest annual start since 2000.
In the first quarter of 2014, the UK FTSE was at its highest level in 14 years. The German DAX and France CAC indices are both at their highest respective levels since March 2009. European IPO activity is mirroring the steady recovery of the continent’s economy, says Joshua Kiernan, a partner in White & Case’s Capital Markets group: “There has been a slow revival, across a number of sectors. We’re also seeing movement on the technology side in Europe. Technology companies—which are often either venture-capital or private equity backed—tend to have a stronger need and desire than those in other industries to pursue an IPO due to the time horizon of their shareholders. In general, where there is a stronger technology industry, you will see more IPOs.
“And although the large numbers of tech company deals echo the earlier boom, the fundamentals are much stronger this time, with robust revenues and positive cash flows,” points out Kiernan.
On track in Asia-Pac?
In Asia, where the US Federal Reserve’s tapering program has precipitated a sell-down of investor positions in emerging markets, and despite the less-than-stellar economic fundamentals, the region’s equity capital market (ECM) activity is holding up reasonably well so far.
The 15 companies that went public in Hong Kong in the first quarter of 2014 raised more than US$5 billion, making Hong Kong the world’s second largest exchange in terms of funds raised. Hong Kong’s extensive track record as an IPO center, coupled with a regulatory environment that is well understood by investors, helps to make it attractive for issuers. Tokyo followed closely behind Hong Kong with US$4.6 billion raised via six IPOs.
But experts caution that a longer-term perspective on Asian ECM markets is needed. While 2013 was busier than 2012 in both Hong Kong and Singapore, major recent and upcoming elections in the larger markets, like Indonesia, Thailand and India, mean that issuers are more cautious, which is reflected by a smaller number of IPOs across the region. Companies with recent listings in Hong Kong have struggled to capture expected value and have faced significant pressure in pricing. Many of the IPOs that were completed in the first quarter of 2014 were priced towards the low end of their indicative price range. A number of deals were also pulled, even after significantly reducing their offer size.
“JOBS” for the US market
The US markets saw a significant rebound in the first quarter of 2014, with 68 IPOs completed, raising approximately US$11.6 billion, according to EY. The US market is now entering its third year of the “JOBS Act,” making IPOs more attractive and initial compliance costs lower for eligible companies. Of the 259 IPOs between April 2012 and September 2013, 80 percent were by “emerging growth companies”—those with total annual gross revenues of less than US$1 billion during their most recently completed fiscal year, the businesses the JOBS Act was designed to help. In addition, the number of listings by foreign issuers coming to the United States remained high, demonstrating its attractiveness, particularly for technology companies.
“While the market is still somewhat choppy, there is a large number of robust companies in the IPO pipeline, including many in the ‘billion plus’ category—companies with valuations of over US$1 billion even before their IPO. This suggests that the market is likely to continue to produce a large number of IPOs in 2014,” says Colin Diamond, a White & Case capital markets partner in New York.
Future of IPOs
Despite bumps in the road, the global IPO market looks set to remain active in 2014. Mainstream financial centers that suffered during the financial crisis, like New York, London and Hong Kong, are now looking to return to former levels of activity, competing for new business. With improved global conditions, the balance has naturally tilted towards New York and London, where fundamentals have underpinned improved liquidity and investor enthusiasm. But issuers may not restrict themselves to the big name financial centers, as, for many, there are many benefits to listing on local markets (see “The dual listing decision” at right).
Another factor that will affect IPOs is the changing policy environment. The financial crisis forced regulators and exchanges around the world to pursue reform in order to avoid similar crises in the future. In many markets, this process is still ongoing. Any unanticipated changes in the timing or scope of regulatory reform— as well as the strength of the recovery—could create volatility in global IPO markets or reduce appetite for issuers from particular regions. This means that issuers will increasingly be looking to launch their IPO at the right time and in the right market for the best possible results.
Choosing the right market
While global IPO activity is encouraging, questions remain over where to list. The decision should be driven by market depth and liquidity, location of peer group listings and whether issuers can find investor affinity and understanding for their particular type of business.
Issuers need to think carefully about which market best suits their sector to maximize exposure to investors who understand their business. Julian Chung, a White & Case partner based in Hong Kong, highlights that, while Hong Kong retains its heavyweight appeal as a listing location, the recent revival of interests in IPOs by Chinese companies in the New York market is once again presenting those companies with an attractive alternative.
In June 2014, the Chinese e-commerce giant, the Alibaba Group, revealed its plan to list on the New York Stock Exchange, heralding what is likely to be the biggest deal of 2014. Alibaba is looking to list in New York not because it has US sales but because it wants a valuation in a market where investors have a better understanding of the sector and the business model. The US capital markets generally give tech companies better valuations as a consequence. Weibo, a company that some describe as the Chinese version of Twitter, also intends to list in New York.
The dual listing decision
Dual listings, in the right context, represent an attractive option. Rather than simply hedging risks between two exchanges, dividing an offering between the two can provide the best of both worlds: it gives issuers simultaneous access to very diverse investment pools that can include key domestic investors on a national exchange who may demonstrate significant interest and commitment to a local company, as well as major international institutions in global financial centers on a larger, higher profile exchange.
This is particularly appealing to a number of issuers considering IPOs, as it can help create demand from a range of investors across different markets.
“European tech industries issuers see London as the biggest European market in terms of liquidity. But dual listings also feature strongly, and this will usually be London or New York—the big financial centers—plus a listing in the issuer’s home jurisdiction,” says Allan Taylor, a London-based partner at White & Case.
Dual listings can also be an attractive option for certain industry sectors. For example, many mining businesses will seek out listings in both London and Johannesburg, or London and Toronto.
In New York’s case, much of the pull, in terms of dual listings, emanates from south of the border: many Latin American issuers look north to New York alongside a domestic listing.