Foreign IPOs in the U.S. on Track for Record-Breaking Year

When Spotify debuted on the NYSE stock exchange back in April 2018, the Swedish financial industry felt it had been overlooked. That one of Sweden’s biggest tech unicorns chose to list itself in the U.S. rather than its home country was striking and demonstrated a clear trend over the past few years: companies want to go public where their valuation and demand will be the highest, and right now, that’s the United States. As the co-founder of Spotify Martin Lorentzon famously said, “we wanted to IPO in the country where we have the biggest market for our service.”

Over the past 10 years, the number of foreign IPOs in the U.S. has increased steadily, reaching a record 87 in 2018. Companies continue to IPO in the U.S. even in 2020’s challenging environment with this year looking poised to beat 2018 if the current trend continues over the next coming months. As of mid-October, we have already seen 66 foreign companies IPO in the U.S. If we project the trend forward to the end of 2020, we would expect this year to beat 2018 with 2020 potentially reaching 88 IPOs—a new record.

The chart below illustrates the trend over the last decade. Note that 2016 was a weak year for the U.S. IPO market with equity markets nearly entering bear market territory during Q1, recording drawdowns of around 10-15% over the first two months, before recovering later in the year.

If we look at the same timeline but consider the sum of gross proceeds, the data indicates bigger companies with higher valuations going public in recent years. 2014 is an anomaly explained by the IPO of Chinese company Alibaba (highlighted in orange below), which was the biggest U.S. IPO in history, demonstrating the impact foreign companies have on U.S. capital markets.

One interesting observation is that only 64 out of the 559 foreign companies listed in the U.S. over the past 10 years have been secondary IPOs. A secondary IPO is a "second" IPO that occurs in a market or exchange different than that of the original IPO. This indicates that companies are not dual listing in the U.S. to improve liquidity or awareness, but rather choosing to IPO in the U.S. full stop.

Sector and Country Breakdown

The Health Technology, Technology Services, and Finance sectors are clearly the areas that attract the most interest. This trend has picked up over the past three years with 151 companies listing in these three sectors since the beginning of 2018, representing close to 30% of all foreign IPOs over the past 10 years.

Based on the incorporation of the company, we can draw some interesting conclusions. Both China- and Cayman Island-based companies are mostly in the Finance or Technology Services space such as Tencent Music Entertainment, Agora, and StoneCo that represent more than 50% of all companies from these two countries. At the same time, the second bracket of Israel, UK, and Canada have a clear majority of Health Technology companies, indicating that these three sectors drive the foreign IPOs in the U.S. If we aggregate Europe as a region, it would represent just over 20% of all companies going public in the U.S., which would put Europe as a whole just below China and above the Cayman Islands in the chart below.

We are also seeing a slowdown of companies based in the Cayman Islands while IPOs by China-based companies have shown greater interest in having a U.S. IPO starting in 2017. One reason that foreign companies, and Chinese companies in particular, want to list in the U.S. is that the cost of capital is significantly lower in the U.S. than that of China and other countries, which carries a larger country risk relative to the U.S. In addition, the U.S. is still the easiest market in which to raise capital.

Comparing Valuations

Apart from access to U.S. investor capital, why do foreign companies choose to go public in the U.S.? Let’s look at the valuation across the different regions for the most popular sectors. For Technology Services, the U.S. on aggregate has higher valuations than its peers in the European and Asian markets, in the range of 2-3x that of international peers. However, for the Health Technology sector, it’s a different story. Asian peers are valued significantly higher than those in Europe while the U.S. is trailing by 2x compared to that of Asian companies.

In the Finance industry, it’s clear that the U.S. trades at a premium compared to its Asian and European peers when looking at the P/B valuation. On aggregate, both Europe and Asia are trading at a slight discount to book compared to the U.S., where it’s a significant premium to book at 1.6x.

However, U.S. IPOs receive more media attention and this creates stronger brand awareness. An interesting case in point is Technology Services company GAN Ltd, which went public in March 2020. The IPO was priced at $8.50 and closed its first day of trading at $13.25, an increase of 56% on the day. Before going public in the U.S., the company was listed on the London stock exchange AIM but choose to move its listing to the U.S. because, according to CEO Dermut Smurfit Jr, investors in the U.S. represent “a natural audience” for the company, making it easier for the company to explain its equity story compared to the UK.

Conclusion

As 2020 comes to a close, it’s clear that more foreign companies will look at some of the historically successful initial public offerings in the U.S. such as Spotify and GAN when deciding where to go public in the future. If companies can benefit from increased investor interest and possibly higher valuations by choosing to go public abroad, attracting companies to be listed on their domestic stock exchanges might be more difficult going forward.