IPOs Dry Up in Developed World but Emerging Markets Show Promise

By Jason Simpkins
Associate Editor

Initial public offerings ground to a halt this year in most of the developed world, as a credit crunch and bear market forced private companies to either postpone offerings, or cancel them all together.

But emerging market IPOs have flourished, accounting for 70% of the total value of public offerings worldwide since April 1.

Globally, the number of IPOs during the second quarter fell by 56% to 205, while the amount of money raised through IPOs fell 64% to $31.5 billion, according to data from Dealogic.

However, that steep decline was largely the result of a collapse in more advanced, Western economies.

The number of deals in Europe, 66, was down 57% from the same period in 2007. The number of IPOs in North Asia, excluding Japan, toppled 37%, from 59 to 37. And the United States suffered the most, with U.S.-listed IPOs dropping 80%, from 56 offerings last year, to just 11.

For the first time since 1978 there were no IPOs for companies with venture capital financing, the National Venture Capital Association reported (NVCA). If the second half of 2008 matches the first half, there will only be 10 venture-backed IPOs this year, less than half the 2002 total.

About 81% of 660 financiers surveyed by NVCA said they do not see the IPO window opening until next year.

The difference between now and then is that in 2007, investment bankers could take a company that just turned profitable public. But in a bear market, investors are more skeptical, and private companies that don't want to see stock valuations plummet as soon as they're listed are far more timid.

Through June, 333 companies went public globally, down from 702 last year, according to Bloomberg data. The $73.2 billion those IPOs generated was a 41% decline from 2007. At least 166 companies withdrew or postponed their initial public offerings in the that time, more than double the amount in the first half of 2007. And roughly a third of those were U.S. companies.

But it's been a different story in emerging markets where IPOs are taking in the lion's share of the cash floating around the world's equity markets.

Emerging Market IPOs Pick Up the Slack

Emerging markets have accounted for 70% of the value of global initial public offerings since April 1, compared with 45% over the same period last year, the Financial Times reported.

The number of emerging market IPOs dropped by 45% in the second quarter, but that compares favorably with a 65% drop in IPO issuance in the developed world.

"IPOs will continue for companies in growth sectors and markets," Michael Lavell, co-head of capital markets at Citigroup Inc. (C) told the FT. "In many emerging markets, the economies are still expanding rapidly, as are the earnings for the companies based there. This is why the majority of IPOs this year are coming from the emerging markets."

OGX Petroleo e Gas Participacoes SA, a Brazilian oil and gas company, was the biggest emerging market offering this year, raising $4.1 billion in its June debut. India's Reliance Power Ltd. and China Railway Construction (PINK: CWYCF) also weathered difficult market conditions to wage successful IPOs, raising $2.6 billion and $2.4 billion respectively.

The Middle East, flush with petrodollars and a robust 8% gross domestic product (GDP) growth rate also added fuel to a fledging IPO market and looks poised to continue.

"There were 52 IPOs during 2007 and in the first half of 2008 there have been 26," Azhar Zafar, head of mergers and acquisitions at Ernst & Young Middle East, told Gulf News. "The total capital raised in the first half of 2008 amounted to $8.69 billion compared to $4.83 billion from 33 IPOs during the same period last year," Zafar said.

Indeed, there has been an undeniable upsurge in emerging market IPOs, but what is most amazing is that Asia, and China in particular, has been largely absent from the picture.

That's because the credit crunch and turbulent markets in the developed world has had a negative impact on Asia, which, unlike Latin America and the Middle East, has been unable to rely on the strength of commodities for growth. 

"Asian IPOs have almost reached a standstill," Leslie Phang, the Singapore-based head of investments at private client unit of Schroders PLC, told Reuters. "Issuers are unwilling to launch at lowered valuations and investors are more focused on reducing their equity positions."

Of course, that may be about to change.

A Possible China Turnaround

The problem is not a shortage of Chinese companies looking to go public. The problem is that the companies that do are concerned their stock won't be fairly priced by an apprehensive market.

"The big issue is whether they will attract proceeds at the pricing levels they are looking for and it's a bit of a disconnect right now between what people think they can get in terms of pricing and what investors are willing to pay for these companies," Eric Landheer, head of Asia Pacific for Nasdaq OMX Group Inc. (NDAQ), told Reuters.

"We could see a flurry of [Chinese listings] in the fourth quarter should market conditions improve," Landheer said.

Market turmoil has forced about 35 companies in the Asia Pacific region, Japan excluded, to withdraw plans to raise approximately $20 billion in offerings this year, according to Thomson Reuters data.

If market conditions improve, we could see a rush of Chinese IPOs coming off the sidelines to take advantage of a more bullish market.

"If we had just a little more stability, I think we'd be seeing more IPOs from China. But they are being challenged by some of the same issues as domestic companies. They're afraid to go out in an environment where pricing fluctuates significantly from week to week," says Scott Gehsmann, a global capital-markets partner at PriceWaterhouseCoopers.

Last year, a record 31 Chinese companies raised $6.8 billion through U.S. listings, but yesterday (Wednesday), China Distance Education Holdings Ltd. (ADR: DL) and China Mass Media International Advertising Corp. (ADR: CMM) became the first Chinese companies to list on a U.S. exchange since ATA Inc. (ADR: ATAI) was debuted in January.

If China Distance and China Mass Media succeed, they could instill some confidence in other wary companies, as well as restore some much needed investor confidence. Unfortunately, it will take time to gauge their success. ATA dropped 8% during its first day of trading but has since recovered and is up more than 50% from its initial price of $9.50.

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