Bloomberg Law
Oct. 6, 2022, 3:03 PM

ANALYSIS: US Market Shivers in IPO Winter; China Feels Fine

Preston Brewer
Preston Brewer
Legal Analyst

The US IPO market has almost entirely frozen over, with very few companies even trying to navigate the treacherous environment of market volatility, rising interest rates, and low investor appetite for new issues. The poor performance of companies that have recently completed their initial public offering has only tightened this winter’s grip.

How Cold Is Cold?

How much have US IPOs fallen? Quite a lot. In the recently completed quarter, US IPOs were down 87.5%, and raised nearly 98% less capital compared to the first quarter of 2021, when new issues peaked. Only 52 companies went public in the US in Q3, raising $2.8 billion.

Were only traditional IPOs counted in Q3, the numbers would be worse still: only 44 IPOs with $2.7 billion raised. And there have been no signs of green shoots to indicate there might be a surge in IPO activity to close out the year.

Looking across markets through the first three quarters of this year, US, Chinese, and European IPOs totaled 702, raising a little over $121 billion. Of those IPOs, 96 were by SPACs, which pulled in $14.9 billion. More than 53% of those 702 IPOs chose to list on Chinese exchanges, including Hong Kong.

In an indication of the market’s weakness, 60 companies downsized their offering against an equal number that upsized. Comparatively fewer US, Chinese, and European IPOs downsized in 2021, with 145 issuers that shrunk their offering against 470 issuers that upsized.

De-SPACing the IPO Data

The recent SPAC frenzy and subsequent slowdown in the US has made a direct comparison to other markets more difficult. The raw numbers can tell a misleading story, as no other global market embraced special purpose acquisition companies with remotely as much fervor.

Another consideration when comparing IPO markets is that some markets tend to produce more IPOs but at smaller valuations. Larger IPOs are typically brought by more successful companies, or at least companies that investors anticipate will grow fast and eventually become profitable, so offering size is an indicator of stronger prospects. Rather than deal counts, total capital raised by an exchange or region, minus SPAC IPOs, generally paints a more accurate picture of IPO markets and the relative strength of the companies being taken public.

In a moderate upset, Europe bested US exchanges in the capital their IPOs have raised this year. European exchanges had not outraised US exchange IPOs since the fourth quarter of 2018.

That notable accomplishment was achieved on the wheels of the continent’s biggest IPO since 2011: Porsche’s monster initial public offering raised $9.2 billion, proof that stable, marquee companies in established industries can still attract strong investor interest. A newly expanded stock link between China and exchanges in Germany, Switzerland, and the UK is also helping to make Europe more attractive to mainland Chinese companies and thereby improve Europe’s IPO performance.

China’s IPO market has outperformed US exchanges in four out of the last five years, including 2022 so far.

China’s Exchanges Defying Global Downturn

Although mainland China and Hong Kong exchanges are on pace to finish lower this year than last year, the number of IPOs and the aggregate amount of capital raised have increased with each quarter.

This performance stands in stark contrast to what happened in the US this year, where exchanges saw a steep decline, and then essentially a plateau in capital raised at the lower level.

US IPOs dropped from 95 in the first quarter, raising $14.2 billion, to 45 in the second quarter, with almost $4.4 billion raised. In the third quarter, US IPOs nudged upward in count to 52, but slid further to $3.3 billion in the more telling capital-raised metric, pulling in nearly $1 billion less capital than Q2.

This year’s quarterly growth is one example of how China’s IPO market has shown considerable strength in recent years, drawing upon a formidable pipeline of industrial (including electronics), technology, and consumer non-cyclical companies.

And more Chinese companies appear to be choosing to list with either Hong Kong as their primary listing exchange and the US as their secondary listing; delisting in the US entirely; or listing in China’s A-share market. The A-share market was the largest IPO market in the world in the first half of this year, accounting for 39% of global IPO financing.

There are a number of factors that may be impacting this listing trend, including:

  • the Chinese government’s subtle enhancement of Hong Kong listing rules relative to overseas exchanges listings;
  • China’s expected easing of IPO rules;
  • geopolitical tensions with the US;
  • some easing of China and Hong Kong’s pandemic restrictions;
  • Chinese companies feeling a rush to list due to timing considerations; and
  • a not-truly resolved dispute over Chinese companies providing US officials full access to their audit work papers.

And the listing trend will likely not abate soon: Goldman Sachs is predicting that Chinese companies will continue to choose Hong Kong over the US for listing purposes.

Furthermore, five state-owned Chinese companies that have been under investigation by the SEC for failing to make their audit work papers available to US officials under the Holding Foreign Companies Accountable Act have said they plan to voluntarily delist from the New York Stock Exchange.

No thaw in this IPO winter should be expected anytime soon in the US, and Chinese companies are likely to continue keeping China’s exchanges warm with activity by increasingly staying home to list.

Bloomberg Law subscribers can find related content on our In Focus: Special Purpose Acquisition Companies (SPACs) page, our Equity Deal Analytics page, and on our Securities Practice Center resource.

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