A few weeks ago I wrote an article titled, “Yes, Size Does Matter – The Current IPO Landscape”, in which I highlighted the most pressing issue affecting today’s IPO environment – the blatant bias towards the large cap company. I was inundated with emails from readers with questions such as, “Do we really live in a world where being “well-endowed” is a requisite for being publicly-traded or for hooking up with your college friend, Jill”? After further research and a brief visual demonstration from my still single college friend, Jill, the more accurate answer is, “not if you are Chinese”.
It is mostly China’s smaller, earlier stage, unprofitable tech companies that are electing to list on U.S. exchanges instead of on their own Greater China stock exchanges where small caps are fetching much higher multiples. Despite U.S.-listed Chinese stocks trading at a 50% to 70% discount to their Chinese peers listed in Hong Kong and Shanghai/Shenzhen, the U.S. capital markets saw a record number of Chinese IPOs last year accounting for almost a third of all U.S.-listed IPOs. According to Ernst and Young, the number of Chinese companies listing in the U.S. is expected to surge by 50% this year – most of these being small and medium-sized Internet or high-tech companies that have great growth potential, but have yet to post a profit.
The fact is many of these Chinese companies are forced to IPO in the U.S. simply because they have been rejected in their own homeland. Apparently you need to be “connected” to list in China – and I’m not talking about “Facebook connected”, I’m talking like “Soprano connected”. The well-connected state-owned-enterprises (SOEs) in China seamlessly obtain approval to list on domestic exchanges, while the discarded Chinese companies in the private sector look to the U.S. public markets for capital. It leads me to wonder if some Chinese tourist mistook the sign on the Statue of Liberty to read, “Give us your small, your unprofitable and rejected/Your huddled masses yearning to breathe free”.
Now I am not grieving for China, for she has emerged as the second-largest economy in the world and is expected to show close to 10% GDP growth in 2011 while the U.S. stammers along struggling just to reach 3%. In 2010, Chinese companies significantly surpassed U.S. companies in terms of IPO issuance and actually raised more capital than Europe and the U.S. combined. According to Dealogic, initial public offerings of Chinese companies accounted for 471 out of the 1,376 total global offerings and raised $104.4 billion or 39% of the total global amount of $269.4 billion. To add even more salt to the U.S. fiscal wound, without the 42 U.S.-listed Chinese deals totaling $3.9 billion in proceeds and the General Motors $15.77 billion IPO, total U.S. IPO proceeds in 2010 would have amounted to a worrisome $19 billion.
While China’s listings are on a tear, the U.S. toils just to compensate for all the listings it continues to lose. According to a study by Grant Thornton, the U.S. would require 520 new listings a year just to keep pace with a GDP growth of 3%. Contrastingly, as China dominates the global IPO market, new listings will exceed its GDP growth and its employment will continue to proliferate.
Given that the greatest price we pay for the lack of new listings is job creation, I am immensely disheartened that the U.S. public marketplace does not afford its own small cap companies the same consideration as its China-based capitalization equivalents. Now, as a capitalist, I applaud the U.S. investors who were able to profit from some of the successful Chinese IPOs, but as a patriot, I fear that our jobs and our wealth are being transferred from America’s heartland to China’s mainland.
Out of the 8.5 million U.S. private sector jobs which were lost since the recession began, a paltry 1.1 million were recovered in 2010, according to the U.S. Bureau of Labor Statistics. By comparison, China created 11.68 million jobs in 2010, vastly surpassing its goal of 9 million. Since small companies are responsible for the majority of our innovation, expansion and job creation, how can we possibly compete with China’s remarkable growth with our own public markets impeding our most promising companies’ access to capital? Instead of fighting for bragging rights over who listed more Chinese companies in 2010, perhaps NASDAQ and the NYSE should be contemplating the consequences of a capital drought for U.S. small caps as the floodgates open for the Chinese.
As the U.S. public marketplace bends over backwards to satisfy the capital needs of America’s larger company and China’s smaller one, fortunately, private company exchange platforms in the secondary marketplace such as Gate Technologies, SecondMarket, SharesPost and Xpert Financial have emerged as an avenue to capital, and in some cases a decisive path to an IPO, for America’s smaller, yet, most promising growth companies. Accredited investors need not travel across the globe and risk choking on pollution or swallowing lead in order to uncover some of today’s fastest growing companies. More and more of these U.S. based companies are realizing the advantages of trading in the secondary markets such as the likelihood of a higher valuation, an increase in brand awareness as well as a greater ability to attract key personnel and additional capital. As such, this marketplace is rapidly becoming an integral component of our capital markets ecosystem.
Many of the young rising companies that trade in the secondary marketplace such as Facebook, Zynga, Twitter and Groupon have experienced monumental growth in 2010, greatly outperforming the U.S.-listed Chinese IPOs. In fact, whereas some of the U.S.-listed Chinese IPOs have appreciated substantially, such as Youku.com (China’s YouTube) and DangDang (China’s Amazon.com), close to half or 41.2% actually declined in value. Indeed, China has done an exceptional job replicating our technology and successful business models. However, it is the ingenuity of America that remains supreme.
The American inventiveness that gave us the light bulb, radio, television, the PC and Al Gore’s Internet (according to Al Gore) will continue to transform the world. I have seen some of these life changing technologies and have met the visionaries responsible for creating them. They are not dwelling behind a great wall, they are finding home in the secondary marketplace. With technology advancing and companies growing at unprecedented speeds, isn’t now, more than ever, the time to invest in America?