Don’t be surprised if you catch your investment banker brushing up on Mandarin. Investment bankers are predicting that foreign firms, particularly those from Asia, will make up a greater number of initial public offerings on U.S. exchanges this year, according to a recent survey conducted on behalf of audit and tax firm BDO USA.
Bankers are optimistic that both the total volume of U.S. IPOs and the number of foreign firms going public in the United States will increase, says Wendy Hambleton, capital markets partner at BDO USA.
About one-third of IPOs on U.S. exchanges last year were by foreign issuers. Fifty-nine percent of investment bankers expect that percentage to increase, and 29% expect it to stay the same, according to the BDO survey. Continuing the momentum of 2010, foreign-based IPOs in the United States are most likely to be from Asia, most bankers predict; Latin America was a distant second, chosen by 16%.
In the fourth quarter of 2010, 17 of the 32 IPOs backed by U.S.-based venture funds hailed from China, according to data tracked by the National Venture Capital Assn. (NVCA). Among them were Youku.com, an online video service, and China Dangdang, a major Chinese book retailer, both of which had very successful debuts.
What does the influx of foreign issuers mean for U.S.-based companies hoping to go public? Most experts say it’s a good thing for domestic firms, believing that a rising tide will lift all boats.
“Positive IPO markets have a halo effect on everybody, so if [foreign] companies get out and trade well, it opens up the window for other companies,” says Peter Falvey, co-head of Morgan Keegan’s technology investment banking unit.
Mark Heesen, president of the NVCA, agrees. “I don’t see [an influx of foreign IPOs] as competition,” he says. “There has been such a limited number of companies going public in recent years, there’s still a lot of room in the market.”
That may be true for pre-IPO funding as well, with foreign investments by VCs common but not yet ubiquitous. According to the NVCA’s most-recent survey, 53% of VCs do not intend to invest in start-ups outside the United States in 2011 (although of those who do, China is the top pick).
In fact, Heesen says he would find it more troubling if foreign issuers did not aspire to list in the United States. “A bigger concern is going to be when these [overseas] companies have such a strong enthusiasm for home exchanges that they stop listing on the NYSE and Nasdaq,” he says, since such listings confer some prestige on the markets and also help generate U.S.-based jobs.
In any case, the increase in foreign IPOs isn’t likely to be a dramatic one, says Hambleton, based on what she sees in the marketplace. “I don’t think anyone thinks it will be a 50-50 split between foreign and U.S. firms,” she says, or that foreign firms “are going to take over as the majority.”
Others point out that even a strong IPO market in 2011 is unlikely to reverse the severe erosion in the public-company universe. Between 1997 and 2008, the number of companies trading on U.S. stock exchanges (not counting those on the over-the-counter bulletin board, but including foreign-based ones) declined 39%, from 8,823 to 5,401, according to data supplied by Grant Thornton. Edward Kim, capital markets senior adviser to Grant Thornton LLP, expects that number to be even smaller when the firm releases a forthcoming update. “We need about 360 IPOs per year just to keep up with delistings,” he notes, “and we haven’t been close to that in a decade.”