Chicago, IL – According to a new study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, a majority (58%) of capital markets executives at leading investment banks believe the number of U.S. IPOs from China-based businesses will increase in 2014. When asked to identify the most prominent factor for an increase in China-based offerings on U.S. exchanges (of those expecting an increase), 40 percent cite a perceived improved commitment by the Chinese to meet U.S. accounting and governance expectations, while more than a third (35%) cite Chinese regulators agreeing to provide the U.S. with more access to documents at Chinese audit firms. Lower proportions identify an increased investor appetite for risk as U.S. markets approach all-time highs (16%) and Chinese businesses willingness to discount share pricing to offset the perception of higher risk associated with a Chinese IPO (9%).
"In 2013, after a two-year hiatus, several Chinese-based businesses conducted successful IPOs on U.S. exchanges," said Lee Graul, a Partner in the Capital Markets Practice of BDO USA. "A majority of capital markets executives are forecasting more of these offerings in 2014 due to the perception that Chinese regulators and potential offering companies are more willing to meet U.S. governance standards and accounting regulations. While we hope this perception is accurate, we would caution investors to tread carefully due to the previous accounting scandals at U.S. listed Chinese businesses that led to the recent hiatus in Chinese offerings."
More on China
Not all bankers are sold on more U.S. listings from China. One quarter (25%) of the bankers think the number of U.S. IPOs from China-based businesses will stay about the same as 2013, while 16 percent expect the number to decrease.
When asked the main reason why they predict no increase in China-based offerings on U.S. exchanges (of those forecasting flat or fewer offerings), the bankers cite three main factors. Forty-two percent say investors have not forgotten the accounting scandals at Chinese businesses of just a few years ago, while 30 percent say Chinese businesses will continue to avoid U.S. regulations. More than one-quarter (28%) believe the U.S. appetite for Chinese offerings will be limited to select internet/technology IPOs.
Given the previous accounting scandals at U.S. listed Chinese businesses, 92 percent of investment bankers say they subject China-based offerings to a higher level of due diligence when vetting potential offerings. When asked where they focus their increased due diligence of these offerings, 45 percent identify internal controls over financial reporting. Corporate governance structure (25%), business risks and how they are addressed (19%) and product/sales trends (11%) were the other areas cited by the bankers.
Overall, at least one half (52%) of capital markets executives believe the percentage of foreign-based IPOs on U.S. exchanges will increase in the coming year, but just 7 percent describe the increase as substantial. More than a third (37%) expect that this percentage will remain flat with 2013 and only 10 percent predict a decrease in foreign-based offerings.
A majority of the bankers (60%) cite Asia as the geographic location most likely to spawn foreign-based IPOs on U.S. exchanges in 2014. Latin America (16%), Europe (13%), Eastern Europe/Russia (9%) and Middle East (2%) were other regions cited.
In terms of which foreign exchanges will be most popular for IPOs in 2014, Hong Kong (27%), Shanghai (19%), Euronext (18%) and London (17%) were the main exchanges cited by the bankers.
U.S. vs. The World
The U.S. led all countries in IPO proceeds in 2013, generating more than one-third of total global proceeds. When asked the chief factor driving this trend, a majority (52%) of the capital markets community identified increased investor confidence in the U.S. economic recovery. Increased investor cash in stock-focused mutual funds (24%) and slow growth in China (18%) are the other factors cited by a meaningful proportion of the bankers.
Moving forward, 41 percent of I-bankers believe U.S. exchanges will continue to increase their share of global IPO proceeds during the coming year, although none of the bankers describe the increase as substantial. An even larger proportion (45%) predict the U.S. cut of the global pie will remain about the same as 2013, while 14 percent anticipate the U.S. share declining in 2014.
The 2014 BDO IPO Outlook Survey is a national telephone survey conducted by Market Measurement, Inc. on behalf of BDO USA. Executive interviewers spoke directly to capital markets executives, using a telephone survey conducted within a scientifically-developed, pure random sample of the nation's leading investment banks.
BDO USA is a valued business advisor to businesses making a public securities offering. The firm works with a wide variety of clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on a myriad of accounting, tax and other financial issues.
About BDO USA
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 52 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,264 offices in 144 countries.
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