Off the ropes: IPO hopes are returning

Big deals in India and China have restored confidence but ADRs have not caught up.

Confidence can be tricky to gauge with IPOs at the moment, but much depends on geography. Investors in London and New York may be seeing the first tentative signs of recovery, but that recovery seems to have run out of puff recently.

In the emerging markets of Asia, eastern Europe and South America, however, things are more positive. Euphoric, even. The Indian Nifty Index has soared 60 percent in the last three months, and in Russia the market is up almost 70 percent since the start of the year. These gains may come from low bases, but they’re still welcome.

Even so, these signs of recovery have yet to filter through fully to the global depositary receipt (DR) pipeline, says David Menlow, president of the IPO Financial Network, a New Jersey-based financial analysis company. ‘I wouldn’t completely ignore those who are trading American DRs (ADRs),’ he says. ‘But right now investors want clear visibility in their own backyard first.’

One good news story has been Changyou, the online video gaming company. Its successful ADR listing on the NYSE had led many commentators to predict a return to better times for the US IPO market. ‘The success of Changyou is extraordinary – up around 130 percent since its April 2 listing,’ says one IPO insider. Chinese firms Duoyuan Global Water and Chemspec International have also performed well since listing this year in the US, pointing to a resurgence of interest in Chinese firms from US investors.

Spreading optimism
Several other large beasts from China are set to list, but these are sticking to their home markets. Sportswear company 361 Degrees International is one example, possibly raising up to $323 mn in Hong Kong, while American International Assurance, the Hong-Kong-based life insurance unit from American International Group, is aiming to raise $4 bn.

India is anther example of increasing IPO optimism. Certainly plenty of large Indian IPOs are on the way, including that of Oil India, the second-biggest Indian oil firm, which is expected to attract around $290 mn. But the big daddy is BSNL, India’s biggest telecoms company, which could raise up to $10 bn when it goes on sale to the public.

Non-domestic investors that have previously bought DRs of Indian companies are less inclined to buy more as valuations rocket; some valuations certainly look over-stretched. That said, Deepak Lalwani, director of Indian investment at London-based stockbrokers Astaire & Partners, thinks the current optimism has strong legs.

Of course, India and China aren’t the only IPO hotspots. One DR operator says Brazil is looking more hopeful as the Latin American economy improves. Even unyielding Europe is beginning to pull things together, particularly with issuers that have contracts that have expired – or are about to expire – and are going out and soliciting interest from the depositary bank provider market.

Easing access
Support has come from the SEC change to Rule 12g3-2(b), making it easier for issuers to exempt themselves from the stringent reporting requirements of the 1934 Securities Exchange Act, and making it easier for depositary banks to establish unsponsored ADR programs. This has affected thousands of listed companies around the world.

‘We’re seeing depositary program providers trying to convince issuers that have unsponsored ADRs to sponsor ADR programs,’ says one ADR player. ‘That way a company can limit its liabilities and maybe get a foothold in, for example, the US shareholder base. The hope is also that people holding ordinary shares in the US will deposit them into an ADR program, which should give them the right to vote and enable them to receive their dividend in dollars.’

All is not doom and gloom in the IPO world, however. There are notable regional subsets of activity that stand out. Taiwan is having an extraordinary time with IPO activity: consumer electronics company BenQ along with HTC and Acer are all looking to assert themselves more globally with listings. There have also been some notable Chinese listings of late, including two on the NYSE and one on the Chinese mainland.

So the IPO market doesn’t lack for biodiversity – but conditions may remain chilly. According to Renaissance Capital there were 273 US-based IPO deals in 2007 with proceeds totaling $60.2 bn. Six months into 2009 there have been just 13 with only $2.3 bn scraped together. Investors plainly still need plenty of coaxing.

What seems common to most regions is the wish to rebuild balance sheets, whether through a rights issue or another type of follow-on public offering.

Investor demand is still there to be tapped, and the handful of successful IPOs conducted over the past few months are testimony to the fact that opportunities remain for companies with the right investment story.

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