IPO swings and roundabouts

There is a nice theory quoted by angel investor Maria Dramalioti-Taylor at last week’s Astia’s women chief executives programme that flotations on stock markets increase if equity volatility is low.

If so, now could be a good time to push through some exits/public funding rounds.

March has seen the Vix, which tracks expected volatility in the Standard & Poor’s 500 largest equities index, trade below 16 for much of the time. By comparison, since the start of 2008, it has averaged 27, according to news provider Financial Times.

The past four years has coincided with low numbers of initial public offerings (IPO) in the US. There were 52 venture-backed companies representing a value of $9.9bn that went public last year, which was a 31% decline in volume but a 41% increase in dollar value from 2010, according to US trade body National Venture Capital Association (NVCA).

These are low compared with 197 every 12 months from 1991 to 2000, the NVCA added, backed up by statisical analysis by Steven Kaplan and Josh Lerner, academics at University of Chicago Booth School of Business and Harvard Business School respectively.

But an important point against the theory that the Vix is the most important indicator of IPO activity (or at least equity volatility combined with other factors, such as buyside interest and regulatory factors) is the consistency of low equity capital markets activity. In the five years up to 2008, the Vix averaged 16, whereas over the past 11 years in total, an average of only 48 venture-funded companies sold shares to the public in the US each year. 

American authorities and trade bodies have been pushing through changes to make it easier to list shares, with the Jobs Act passing the US Senate last week – against some pushback from former regulators and influential commentators, including those at Fortune and PEHub.

But the US remains attractive to foreign companies, see this week’s Big Deal on Novaled’s plans to list its American Depositary Shares. Accountants Deloitte keeps tally with latest figures (for 2007-2008) showing more than 700 overseas corporations listed on the Nasdaq and New York stock exchanges, just slightly more than the 708 on the UK’s two main markets.

But for technology companies, the attractions of the US remain clear. Henri Winand, chief executive of UK-based fuel cell developer Intelligent Energy, said his personal view was the US was making itself more attractive to list fast-growing tech businesses than on other markets, such as the UK.

He said: "In the ecosystem of tech companies, the IPO market in the UK is very difficult because of a lack of price matching between buyers and sellers. In the past 12 months there have been no new issues apart from mining or resource companies and tech companies have left [been de-listed]. The UK should make itself attractive for fast-growing companies as the US is modifying Sarbanes-Oxley [which tightened standards on American exchanges after the last dot.com bubble burst in 2000]."

But the arguments on tweaking rules in established Western stock markets is redundant if other venues offer acceptable standards with high valuations.

While the USX China Index of 174 Chinese stocks trading on Wall Street fell by 21% last year to 12 times earnings, it was 20 times for Hong Kong’s Hang Seng Composite Information Technology Index, according to news provider Economic Times of India.

But for those looking in the rear-view mirror, the US still held the edge: at least 48 Chinese technology stocks, including Baidu and Youku.com, completed IPOs in the US since 2000 to raise $7.8bn but, by comparison, 17 did in Hong Kong, the Economic Times added.