Getting an IPO done when markets are bearish is like trying to have a serious conversation with a patient when a pain crisis occurs: you’d rather come back at a better time.
With no USA deals in January, a first since the inception of our Fund, the US IPO market was obviously more preoccupied dealing with Oil prices and the Chinese economic slowdown than with welcoming new equities to the market. Four IPOs were postponed or withdrawn: Elevate Credit, AmeriQuest, Schimmick Construction, Nordic Realty Trust, and many more simply did not manage to get out of the woods.
Asian IPOs are usually less sensitive to plummeting indexes or alarming market data. In January, while the Hang Seng Index navigated in negative double-digit territory, 6 IPOs were completed in Hong Kong. Moreover, according to the data provided by Thomson Reuters, the Asia-Pacific region sold 46 per cent of all equity globally in January — $1.7bn more than the $9.7bn total of the deals in North America, Europe, the Middle East, and Africa combined.
The only deal our Creative IPO Fund participated in during the month of January was indeed in Hong Kong. NNK Group, a mobile transaction service provider, brought us a great 21% return albeit on a meager allocation, as it was a very small IPO with only USD 15M raised.
The composure shown by Asian IPO players during choppy stock markets is not the only difference we can discern with their US counterparts. The IPO process is also quite different. While the trading date in the US is unknown to the public until about two weeks before, and can be changed at the last minute, in Asia the trading date is part of the filing documents, and it is usually published between 4 to 8 weeks ahead of time. A postponing is also very rare.
Other big differences can be seen in the pricing of the IPO. In the US, the initial price range (bracket) is published only about two weeks before the trading day, and the final pricing can be above or under the initial range depending on the appetite shown by investors during the road show. It often happens that the IPO is priced at the last minute, even the night before the trading day, as was the case with Square (SQ) in November 2015.
Conversely, final pricing in Hong Kong and Japan is determined at least a week before the trading day, giving the investors the time to confirm whether they have any interest in the new equities. The final pricing must be within the initial range announced.
In terms of results, it’s also worth noting the once wide ROI gap between US IPOs and Asian IPOs is now narrowing. In 2015, our ROI in US IPOs was 16.83%, compared to 12.73% for our Asian IPOs. In 2014, the ROIs were respectively 11.67% and 4.53%.
We expect even better returns this year with the implementation of the Shanghai-Hong Kong Stock Connect, which now allows China Mainland investors to gain access to the Hong Kong Exchange financial products and vice versa.
In Japan, a notoriously difficult market to gain access to, we were able to source 7 IPOs in 2015. Thanks to our strong relationship with several local underwriters, our 2016 pipeline looks strong and we are already confirmed in deals during the month of February.
Our access to Asian IPOs makes our Fund very unique. In 2015, we participated in 14 IPOs in the region (15 in 2014). Our investment manager benefits from his long and vast experience with Asian markets, and last year Lexinta opened a new office in Hong Kong. This will allow us to be even more active in this region.