Asia Leads the IPO Race as U.S. Drops Further Back


There is no more potent indicator of economic vitality than a country's market for initial public offerings. That's why a Bloomberg report that China leads the world in IPOs, while the U.S. lags -- now accounting for just 11% of the world's IPO value -- is worth noting. What's interesting about the Chinese IPOs is that they're mostly for state-owned companies being taken public, and that much of the stock is being picked up by institutional investors around the world.

But Chinese companies aren't as good on the disclosure and governance fronts as those in the U.S., which raises the question: Will these investors get their money's worth?

The IPO boom in Asian markets is compelling. Before the year is out, Bloomberg expects IPOs in China, Malaysia, and Australia to add $10 billion to the $134 billion already raised through IPOs in Asia as of Oct. 25. The new IPOs are all selling shares of large, established, government-owned businesses: Jiangsu Rongsheng Heavy Industry Group (China), Petronas Chemicals Group (Malaysia), and coal train operator QR National (Australia).

Over the last 11 years, Asia's IPO market has ascended while the U.S. market has imploded. Led by China, which has raised $76 billion through IPOs in 2010, Asia's share of global IPOs has increased from 12% in 1999 to 66%. Meanwhile, U.S. IPOs have declined from around 44% to 11% during the same time period, according to Bloomberg.

Bloomberg reports that seven Chinese offerings raised more than $1 billion each in in 2010 -- including the $22.1 billion Agricultural Bank of China IPO in Shanghai and Hong Kong last quarter. By contrast, the biggest U.S. IPO raised $700 million, and 54 U.S. companies have postponed or withdrawn their IPOs this year.

Be Wary of Asia's Lax Standards

What is going on here? As I learned while doing research for my book, Capital Rising: How Global Capital Flows Are Changing Business Systems All Over The World, co-authored with Srini Rangan, investors are chasing growth around the world. With China's economy growing at around 9% to 10% and no evidence of a slowdown on the horizon, it's hard for the U.S. and its 1% to 2% GDP growth rate to stay in the game.

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But there are serious and noteworthy differences in the character of the IPO markets between Asia and the U.S. The big Asian IPOs reflect government decisions to tap investor appetites for growth by selling stakes in established companies that meet basic needs in their emerging economies.

Those giant IPOs aren't necessarily Asia's best performers in the after-market. Through Oct. 25, 2010, Asian IPOs have climbed 36%, with six of the top 10 performers on U.S. exchanges this year coming from China and India. MakeMyTrip (MMYT), India's largest online travel company, rose 173%, while JinkoSolar Holding (JKS), a Chinese maker of silicon wafers in added 155%. By contrast, the S&P 500 was up less than 7% over the period.

Investors seeking to acquire shares in Chinese IPOs should beware of the differences in accounting and governance practices between China and the West. For example, China Briefing reports on many specific ways that Chinese firms typically understate their income to avoid taxes. And the Asian Corporate Governance Association reports that China is ranked "constantly in the bottom three for corporate governance, just above the Philippines and Indonesia."

While none of these factors seem to be worrying investors now, they ought to scare pension fund managers, who will look awfully lax in their due diligence if they invest in these companies, only to see them suffer a plunge in value later when the tide goes out.

Replacing Paper Entrepreneurialism With Real Innovation

The U.S. IPO market hasn't been strong since the Internet boom of the late 1990s. While there were U.S. IPOs in the 2000s, the biggest were mostly private-equity firms cashing out their stakes in divisions of established companies whose balance sheets they had restructured. Bloomberg found that more than half of 2010's 13 initial sales from private-equity firms left buyers with losses, and through May, those shares were the worst performers in 2010's IPO market.

One example was Metals USA Holdings (MUSA), which shapes steel and other alloys into parts. Shares in the company, owned by Leon Black's private-equity firm Apollo, lost 28% in the first month after its $240 million IPO.

All this private-equity paper entrepreneurialism is beside the point when it comes to getting the U.S. back into the game. The key to reviving the U.S. IPO market is to create a business ecosystem around groups of related technology startups that deliver big boosts in business productivity.

That's what happened in the 1990s thanks to the Internet. But it's not at all clear that social networking, in which Facebook offers the best chance for a blockbuster IPO, can propel a similar wave of business investment in technology. So for the time being, the U.S. seems destined to be the place that China and India will look to list shares in their technology companies.

Unfortunately, for those looking to lower the unemployment rate, the jobs that these IPOs will help create are not going to be offered to U.S. workers.

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