The much-anticipated US initial public offering (IPO) filing last week from Chinese internet giant Alibaba reflects a growing trend in the capital markets world.
Figures from Dealogic show that the value of listings by Chinese companies on US stock exchanges so far this year stands at $676m (£401.5m) – even before the Alibaba IPO, which is expected to raise north of $1bn (£590m).
The numbers mark a real turnaround compared with just two years ago, when PRC corporates were delisting in their droves from the US.
There were no listings at all in the same period last year and only $72m (£42.7m) worth in 2012. In 2011 the figure was $601m (£356.9m) for the same period. China’s technology companies – like Alibaba – are leading the way, especially those dealing in e-commerce, social networking and mobile apps.
And thanks to the growth in China’s internet market and a healthy appetite for tech stocks among US investors, lawyers don’t see the trend abating in the second half of the year.
“There are several reasons why PRC companies have been listing in the US,” says Li He, a US and Hong Kong-qualified capital markets partner at Davis Polk & Wardwell in Beijing. “One is that to list domestically or in Hong Kong there is a threshold – companies need a certain revenue or market capitalisation.
“Another is that for technology companies and particularly internet companies it is easier to market themselves [in the US]. US investors are more familiar with these kinds of businesses and so the valuation is often higher. A third reason is that it makes it easier to do a US acquisition in the future.”
Investors also remain undeterred by Chinese companies’ use of structures to sidestep government restrictions on foreign ownership in certain industries. Similarly, the 2011 concerns over accounting fraud and compliance issues in PRC corporates have been alleviated after limited evidence of fraudulent behaviour was found.
“There doesn’t seem to be much concern about the VIE [variable interest entities] structure, both from the regulators’ standpoint and the perspective of investors,” says one China-based partner. “At the same time the suspicion that used to prevail about systematic fraud involving Chinese companies has not amounted to anything.”
Unsurprisingly, US law firms are profiting from the resurgence in US IPOs. This is despite their UK counterparts, such as Freshfields Bruckhaus Deringer, Clifford Chance and Linklaters, being among the most active on the Hong Kong IPO scene. Indeed for the Alibaba deal, Freshfields was originally appointed to advise the issuer when the IPO was planned for Hong Kong, but was quickly replaced by Simpson Thacher & Bartlett when the e-commerce giant decided to list in New York.
Within the US group, a handful of players are dominating. These include Davis Polk, Kirkland & Ellis and Skadden Arps Slate Meagher & Flom. Other firms, such as Shearman & Sterling, O’Melveny & Myers and Sullivan & Cromwell, have also been winning mandates, though they have advised on fewer deals.
Compared with Hong Kong IPOs, partners say firms can charge higher hourly rates, but are typically required to do less work, thus bringing in less revenue overall.
Matthew Bersani, Hong Kong managing partner for Shearman & Sterling, says it is unlikely that firms will react immediately to the shift westwards because of high market volatility and a need to balance the business in Asia. He expects that a small group of firms will continue to reap the benefits in the short term.
“It’s a very volatile market so it’s hard to say how long it’s going to last. I don’t think any firm is going to react to six months of activity. And with Hong Kong IPOs we are actually more consistently busy. But it’s a resurgence of a revenue stream and US firms have definitely benefitted.”