After experiencing a downturn during the period of high interest rates, the IPO market is gradually warming up.
Drew Bernstein, co-founder and co-chairman of Marcum Asia CPA firm, recently said in an exclusive interview with a reporter from 21st Century Economic Report that in 2024, the U.S. IPO market continues to show an upward trend. As of September, there have been 98 IPO transactions, raising $24.1 billion, which is a 31% increase in the number of transactions and a 58% increase in funds raised compared to the 75 IPO transactions and $15.3 billion raised in the same period of 2023.
Although the issuance of new shares still faces some ongoing headwinds, including the upcoming U.S. elections and the uncertainty of the pace of interest rate declines, Bernstein believes that the biggest factor affecting interest in IPOs is still their performance after listing. This year, the average return on investment in IPOs is 3.7%. Although this is an improvement over the -7% return last year, it still lags behind the 18% increase in the NASDAQ index this year. When the performance of IPOs exceeds the market performance in one or two quarters, investment institutions will rush to conduct more IPO transactions.
For the artificial intelligence boom, investors are also starting to think rationally. Bernstein analyzed that so far, the artificial intelligence boom has mainly focused on private venture capital and large technology stocks. In both cases, the speculative stage may have reached its peak. Investors are no longer fascinated by the vision of "how artificial intelligence will change everything," but instead start to ask how it can add value to specific business and consumer applications and how to transform it into a sustainable business model.
With the increase in trade restrictions in the United States and other places, protectionism will also bring a series of impacts. Bernstein said that the most significant adverse impact will be the increase in costs for American consumers and the reduction of access to advanced technology. Chinese companies will focus most of their growth on non-aligned regions with growing populations and economies, including Southeast Asia, Latin America, and Africa. These markets may be more constrained by prices, but in the long run, they will be the main regions for global growth.
The U.S. IPO market is showing an upward trend.
21st Century: Under the impact of high interest rates, the U.S. IPO market has warmed up to some extent, but it is still not active. What conditions are needed for the IPO market to return to normal?
Bernstein: In 2024, the U.S. IPO market continues to show an upward trend. As of September, there have been 98 IPO transactions, raising $24.1 billion, which is a 31% increase in the number of transactions and a 58% increase in funds raised compared to the 75 IPO transactions and $15.3 billion raised in the same period of 2023. Moreover, these figures do not even include the 32 special purpose acquisition company (SPAC) IPO transactions this year.Of course, this is far from the frenzy of new transactions in 2020 and 2021, but can the number of such IPOs really be considered "normal"? I believe that we previously experienced a cyclical speculative burst with particularities, a burst that was based on sustained zero interest rates and the desire for financial entertainment during the COVID-19 pandemic.
As of this September, the number of Chinese companies going public in the United States has surged to 31, nearly double the 17 companies from the same period last year. However, most of these companies' IPO sizes are quite small, with only two raising more than $100 million, and their stock performance has generally been poor, with an average drop of over 20% compared to the issue price.
Currently, new stock issuance still faces some ongoing headwinds, including the upcoming U.S. elections and the uncertainty of the pace of interest rate declines, but the biggest factor affecting IPO interest is still post-listing performance. This year, the average return on investment in IPOs is 3.7%. Although this is an improvement over last year's return of -7%, it still lags behind the 18% increase of the NASDAQ index this year. This year, "coasting" by buying index funds has yielded decent returns, so why go through the extra work? When the performance of IPOs exceeds market performance for a quarter or two, investment institutions will rush to conduct more IPO transactions.
21st Century: The Federal Reserve has entered a rate-cutting cycle, and interest rates will gradually decrease, but it will be difficult to return to ultra-low levels. Does this mean that the IPO market will find it hard to return to its previous hot state?
Bursting: Interest rates are an important factor in driving stock valuations, but I believe that a zero interest rate environment is not a healthy way to set the cost of capital; it tends to inflate asset values across the board, including those that do not generate economic value. A hot IPO based on zero interest rates is like a "high sugar effect," which will eventually collapse.
In the long run, the IPO market is driven by supply and demand. A healthy market relies on the supply of high-growth companies with clear paths to profitability. At the same time, a good regulatory environment is needed so that the advantages of going public are not offset by excessive costs and bureaucracy.
Investors Begin to Rationally View the AI Boom
21st Century: As the AI boom sweeps the globe, financing for related companies has become one of the few bright spots in the market. Is there a bubble in the current AI fervor? Will it gradually cool down in the future?
Bursting: So far, the AI boom has mainly focused on private venture capital and large technology stocks. In both cases, the speculative phase may have reached its peak. Investors are no longer beguiled by the vision of "how artificial intelligence will change everything," but instead begin to ask how it adds value to specific business and consumer applications and how it can be transformed into a sustainable business model.**21st Century**: China is actively developing new forms of productive forces. Which industries will have more opportunities in the future? How can the capital market help China's economy cultivate new drivers?
Borstin: It is an undeniable fact that China is making rapid progress in industries such as electric vehicles, solar energy, and batteries, leading the rest of the world. Without any trade barriers, it would be difficult for American and European companies to compete in these markets. In many cases, the foundational core technologies were initially developed in the United States, but then companies and government policymakers made mistakes in scaling up and reducing the cost curve. Currently, this situation is playing out in fields such as artificial intelligence, robotics, and quantum computing. In many ways, the United States has now adopted China's industrial policies to ensure they do not lose in another wave of innovation. Therefore, the fact that these two huge, technologically advanced economies are both very focused on many of the same industries makes things interesting.
In many cases, the stock market is the most effective mechanism for allocating capital to high-growth, high-potential markets. For industries such as the internet, solar energy, and electric vehicles, overseas listings have been crucial for the development of today's market-leading companies. However, some national governments have expanded the definition of "security-sensitive" industries, which has hindered the exit of private equity investors. Despite this, we still see a large number of private companies seeking to list overseas, providing liquidity for private equity investors and building a global platform for their businesses. This path has not been blocked, but it requires very cautious strategy and realistic expectations.
**21st Century**: Despite facing some challenges, a series of Chinese companies still plan to list in the United States recently. What benefits can listing in the U.S. bring to companies?
Borstin: There are some significant advantages to listing in the United States, which have not disappeared. First, it allows companies to establish a global brand, opening doors for partnerships, talent recruitment, and entry into new markets, which cannot be achieved solely by domestic listings. Second, in certain specific industries, the U.S. market has a concentration of expertise from research analysts and buy-side funds. Lastly, once a company has gone public and established an execution track record, it can be very flexible in subsequent equity, debt, and convertible instrument issuances. If a company has decades of growth prospects, then even if the funds raised in the initial public offering are lower than expected, this will be very valuable.
**21st Century**: This year, the NASDAQ Golden Dragon China Index fell sharply at one point. How do you view the relatively weak performance of Chinese concept stocks? How can they break out of the doldrums in the future?
Borstin: In the short term, the valuations of Chinese concept stocks may be affected by macroeconomic factors, domestic policy changes, or geopolitical issues. However, in the long term, stock performance is driven by earnings and cash flow. China is the most competitive market globally, which means that when a company creates considerable profit margins, it is likely that other companies will swarm to try to lower its prices or surpass its innovation. American CEOs either achieve profit growth or are eliminated. Chinese CEOs may have other important social goals to consider.
**21st Century**: Based on your frontline observations, where do Chinese companies currently prefer to list? What are the advantages and disadvantages between different markets?Borstin: It depends on the company's long-term strategy, the industry it's in, and the adaptability of its management. For some companies, going public domestically is the best and only option. Some businesses choose to list in Hong Kong, China, which may enable them to have fully convertible currency while marketing to both overseas and Chinese investors. For certain companies, the advantages of listing in the United States, which we discussed earlier, are worth the higher costs and sacrifices to reach the global investor community. But in any case, one should not simply pursue the highest valuation because market conditions may have changed dramatically by the time the IPO process ends six to twelve months later.
Increased U.S. Trade Restrictions Raise Consumer Costs
"21st Century": The outcome of the U.S. election is a focal point of global attention. How should businesses cope with the uncertainty of the election results? How can investors prepare in advance?
Borstin: At present, the election outcome is unpredictable. Most companies are trying to develop an "all-weather strategy" so that they have options regardless of who wins or which campaign promises are actually fulfilled.
"21st Century": With the increase in trade restrictions in the United States, Europe, and other places, what adverse effects will protectionism bring? How to deal with a relatively more conservative world?
Borstin: The U.S. government cannot afford to lose the automotive industry and is currently determined to revive domestic solar production. The most significant adverse effect will be an increase in costs for American consumers and a reduction in access to advanced technology. Europe's actions are relatively moderate and are on a similar path.
Therefore, I believe that Chinese companies will focus most of their growth on non-aligned regions with growing populations and economies, including Southeast Asia, Latin America, and Africa. These markets may be more price-sensitive, but in the long run, they will be the main areas of global growth. Chinese management teams are very pragmatic in dealing with changing policies and can adapt quickly and find opportunities.