A surge in technology IPOs in the first quarter of 2014 was driven in large part by China, following the reopening in December of that country’s IPO market, PwC has reported in a newly released study.
According to the PwC study, “Global Technology IPO Review: Q1 2014,” of 26 tech IPOs valued at over $40 million filed in Q1, 11 of those companies were Chinese. That was second only to the United States, which had 12. Alan Jones, deals partner at PwC, said in a recent interview that Q1 was “a banner quarter for technology IPOs,” with about $1.9 billion in proceeds.
“That was roughly double what we saw in Q1 of the prior year,” Jones said. “That momentum really carried into early April—in the first two-and-a-half weeks, we actually saw nine technology IPOs, that raised an additional $2.7 billion—the biggest of those raised $1.3 billion. This has been a period like no other recently, within the technology space, when it comes to the number and volume of IPOs.”
Jones said the rally temporarily stalled out in mid-April, which he attributed largely to broad valuation concerns.
“With some of the recent deals, both from an M&A perspective and from an IPO perspective, I think there was general concern from investors in terms of valuations—whether we were in a bubble economy,” Jones said. “So there’s been a pullback from an investor perspective. What we’re seeing is much more selectivity among investors, in technology as well as in other sectors.”
Jones said he expects to see China play a large part in restarting the rally.
“I think there are several IPOs in the U.S., China, and elsewhere overseas that have rapid growth, scale, margin, and predictability. They’re market leaders with large addressable markets,” Jones said. “A huge driver for any Chinese IPO is the addressable market. Sometimes it’s not the underlying base fundamentals; it’s the opportunity to tap that large, addressable market—that’s really the driver for the tech IPOs that we’ll see starting to come back.”
I asked Jones for his thoughts on the significance of the recent IPO filing of Alibaba, the Chinese e-commerce giant, and the impact it will have on the IPO market this year. He declined to address the Alibaba deal specifically, citing PwC’s communication policy. But he did share his thoughts on the impact of the reopening of the Chinese IPO market in general, and the attractiveness of listing in the U.S.
“As a result of [the reopening] you are seeing a lot of Chinese companies coming to the Shanghai exchange, the Hong Kong exchange; and the larger companies look to list in the U.S.,” Jones said. He said there are several drivers for a U.S. listing, one of which is valuation within the U.S. market. “The multiples are much more appealing than what you get in Hong Kong and China,” he said.
Jones also cited corporate governance, in terms of the ability to have two tiers of shareholders, which is common in many Chinese companies.
“We’re also seeing that within the U.S.—there are a lot of tech companies in the U.S. that have this two-tiered shareholder structure,” Jones said. “You don’t have the ability to do that in the Hong Kong exchange. So if your company wants to maintain close control of your shareholding, the U.S. markets do enable you to do that from this two-tiered shareholder structure, which is very appealing to large Chinese companies.”
China aside, I asked Jones in what technology areas he sees tech companies being best positioned for a successful IPO this year.
“Investors are looking for quality companies, particularly within the SaaS space,” he said. “SaaS has stalled out a bit, but for companies that have scale and margin, and are market leaders, there are opportunities because of the predictable revenue streams. Wall Street loves predictability—that’s why Wall Street loves SaaS. So I think we will continue to see growth within the SaaS space. Health tech continues to be a hot space, as well.”