Emerging-market IPOs set for good year

Singapore

INITIAL public offerings (IPOs) from emerging-market issuers are set for their best year since the global financial crisis; this is despite investors becoming more selective about where they place their capital - amid a renewed appreciation of risk - towards the end of the year, says international law firm Baker & McKenzie.

The firm noted that cross-border IPOs from emerging-market issuers have seen a 154 per cent increase in capital raised in the first three-quarters of this year, compared to 2013.

Much of it was due to Chinese e-commerce giant Alibaba's record-breaking IPO in the United States earlier this year. The US$25 billion raised from that contributed to 60 per cent of the total value raised on cross-border IPOs for the first three quarters of this year.

The Alibaba IPO, in fact, pushed the total amount of equity capital raised across borders by emerging-market companies to a level not seen in any year since 2007.

The year's five largest emerging-market IPOs, including Alibaba, were all from China: pork producer WH Group's share offering in Hong Kong raised US$2.36 billion in capital; e-commerce firm JD.com Inc's share offering on the US Nasdaq raised US$2.05 billion; Harbin Bank Co Ltd's share offering in Hong Kong raised US$1.22 billion; and Luye Pharma Group, which counts Singapore's GIC among its investors, raised US$878.15 million in Hong Kong.

Baker & McKenzie also noted that the stock exchanges of choice for emerging-market issuers over the past five years have been the Hong Kong Stock Exchange, the New York Stock Exchange (where Alibaba is now listed), the London Stock Exchange and the Nasdaq.

Emerging-market issuers have raised more than US$138 billion in 373 IPOs in the past five years, on these four exchanges alone.

Still, despite such momentum, Baker & McKenzie notes that "deal fatigue" has set in among investors as the year draws to a close - with investors being much more discerning about where to stake their capital.

"Emerging equity had a great year until shortly after the Alibaba IPO," noted Koen Vanhaerents, global head of capital markets at Baker & McKenzie. "With deals now being postponed amid greater volatility caused by economic and geopolitical headwinds, it's essential for any would-be issuer to undertake a comprehensive assessment of the risks and challenges that they face and to document these properly if they are to convince international investors that their story is worth buying into."

This desire for transparency is particularly relevant in cross-border deals or where issuers have significant operations in emerging markets.

"While companies have long been subject to obligations to disclose business-critical information in their offering documents, those disclosures are now receiving even greater scrutiny. Investors seek a better understanding of the issuer's business and the drivers of its profitability, while regulators are intensifying efforts to ensure that issuers comply with their legal disclosure requirements," Mr Vanhaerents added.

To that end, the firm has published "Troubled Waters: Navigating risk in cross-border capital raisings", meant to assist issuers with better assessing and disclosing risks when raising capital outside of their home jurisdictions.

The report also provides an overview of some of the risk factors that are attracting specific interest from investors and regulators, and offers practical guidance on how companies can better assess these risks.