Baker McKenzie partners consider the role of
geopolitical tensions in growing competition between stock
exchanges around the world
| 1 Minute read |
| At a time of heightened
geopolitical tension, stock exchanges around the world
are considering how to increase their share of the IPO
market and, in particular, how to attract the new wave of
new economy companies to list. As the pace of listing
reforms accelerates, this article considers the various
strategies and initiatives that key global stock
exchanges have either introduced or are pursuing as the
battle for listings intensifies |
At a time of heightened geopolitical tension and the
return of volatile markets, with Brexit and a US-China trade
war never far from the headlines, stock exchanges around the
world are looking at ways to increase their share of initial
public offerings (IPO) and, in particular, how to attract the
next wave of new economy companies to list.
Coming off the back of a sterling performance in 2018 when
over $60 billion was raised by companies through cross-border
IPOs, global cross-border IPO activity faltered in the first
half of 2019, with total value down 55% to $11.3 billion and
volume down 16%, with 85 listings recorded. Despite the decline
in listings, this was still the second-highest level seen since
2014.
While cross-border activity was down overall, it was the dip
in capital raised by Chinese issuers – down from $15.3
billion in H1 2018, to $8.8 billion in H1 2019, a decline of
42% – that accounted for such a significant drop in
value.
Factors affecting listing venue
Where companies choose to list is ultimately based on a
number of different factors, but top considerations are likely
to be valuation and liquidity, together with the strength of
the regulatory regime, extent of analyst coverage, and the size
of the investor base. The costs of listing, the sector focus of
the exchange and the efficiency or speed of the process are all
important, as is listing in a country that is in or close to a
company's biggest current or growth markets.
Companies think about what exchange will get them the best
valuation on day one, but also which will give them investor
interest from day two and beyond – so for many
companies that will mean their local market or a market aligned
with their business strategy. For example, if a company's
growth story is around China, listing in Hong Kong makes sense.
Or, for instance, there will be a specialisation of exchanges
– Australia, London and Toronto for mining, Hong Kong
for branded consumer goods and those focusing on China or Asia
Pacific.
It is partly for these reasons – companies seeking
a listing in a foreign country that represents a core growth
market for their business, or an exchange in a foreign country
that specialises in listings from their industry –
that cross-border IPOs are flourishing. Also important for
companies is being able to access deeper pools of international
capital, and listing in a country where there may be fewer
regulatory restrictions than in their domestic market or,
conversely, higher regulatory requirements that may enhance the
company's reputation.
Despite some eye-catching regulatory and listing rule
changes introduced in the last couple of years, competition
between stock exchanges in key global money centres is nothing
new. While the majority of companies will still find good
reasons to list on their domestic exchange, the impact of
globalisation and the free movement of capital has broadened
the conversation and provided new opportunities for companies
to tap overseas capital and enhance their visibility and
profile in critical markets.
Tech sector leads the way
With stock exchanges, particularly in Asia, modernising
their regulations and looking to position themselves as
credible alternative exchanges, we are now seeing the
development of rivals to the traditional players in the west. A
new battleground is emerging among exchanges as they make
issuer-friendly changes to their rules and requirements in a
bid to attract future unicorns and the myriad of companies
developing next-generation technologies.
Last year the technology sector was not only one of the most
prolific by number of IPOs, but also a leader by total value of
capital raised. Some of the largest listings last year came
from Chinese technology companies, including the IPOs of
smartphone maker Xiaomi, Foxconn Industrial Internet, and video
and music streaming companies iQIYI Inc. and Tencent. Such high
levels of activity are expected to continue, not least because
of the bulging pipeline of technology unicorn IPOs to come.
The ability to attract the kind of high-growth technology
companies that are reshaping business models and weaving their
way into our everyday lives is a key consideration driving many
of the changes we are now seeing across exchanges as they
compete for listings. In 2014, Chinese issuer Alibaba raised
$25 billion through its listing on the New York Stock Exchange
(NYSE) in what remains the largest IPO in history.
Hong Kong had traditionally been seen as the venue of choice
for Chinese-based companies, so why did Alibaba choose the US?
A key differentiating factor at the time between Hong Kong and
the US was that while the US exchanges permitted dual class
shares, or weighted voting rights (WVR) as they are known in
Hong Kong, the Hong Kong Stock Exchange (HKEx) did not. While
dual class shares remain controversial among investors, they
are particularly popular with founder-led companies that want
to retain voting control. They argue that this allows them to
focus on growing the business without the distraction of
short-term investor demands for share price increases.
Hong Kong steps up the competition
Traditionally, one-share, one-vote was the principal
shareholding structure of companies listed in Hong Kong, but
the loss of such a marquee listing from its closest neighbour
to its international rival appeared to trigger an urgent
strategy rethink by the HKEx.
Following a public consultation, on April 24 2018, it
published its conclusions and decision to amend the listing
regime to facilitate the listing of emerging and innovative
companies by permitting the use of WVR structures. Under the
new listing rules, WVR with a greater voting power (maximum of
ten times) could attach to a particular class of share,
although certain fundamental matters remain subject to voting
on a one-share, one-vote basis. The changes brought immediate
dividends as first Xiaomi and then online services provider
Meituan Dianping, two high profile Chinese technology firms
employing WVR, chose to list in Hong Kong.
In addition to allowing dual class shares, the HKEx also
introduced changes to permit the listings of pre-revenue
biotech companies that do not satisfy any of the financial
eligibility tests. Ascletis Pharma, a Hangzhou-based biotech
company with a new drug to treat hepatitis C, became the first
pre-revenue biotech company to list on the exchange, and
several more have since followed.
Although the share prices of both Xiaomi and Meituan
Dianping delivered underwhelming performances following their
listing debut, which somewhat dampened the excitement around
the new listing regime, the HKEx continues to retain its appeal
as a result of its decision to permit the listing of both dual
class shares and pre-revenue biotech companies. In fact, the
new issue activity on the HKEx last year was stellar, enabling
it to regain the top position globally from the NYSE as the
number one exchange by number and value of IPOs.
The revised listing rules also established a new
concessionary secondary listing route for innovative companies
that have their primary listing on the NYSE, Nasdaq or a
premium listing on the London Stock Exchange (LSE), and it
hopes this will positively impact the HKEx's ability to attract
companies with overseas listings to conduct a secondary listing
in Hong Kong. Alibaba, China's e-commerce giant, is, according
to reports, planning to commence a secondary listing there
before the end of the year.
Cross-border collaboration
Some bourses are also realising that there may be benefits
to collaborating with the competition. Over the past few years,
Hong Kong, Shenzen and Shanghai have operated a Stock Connect
system. This has allowed both international and mainland
Chinese investors to trade securities in each other's markets
via their home exchange. With this blueprint in mind, on June
17 2019, the LSE and the Shanghai Stock Exchange (SSE)
announced the first day of trading for their London-Shanghai
Stock Connect project, which allows companies listed on the two
exchanges to issue, list and trade depositary receipts on the
counterpart's stock exchange. The first company to take
advantage of this was the Chinese brokerage Huatai, which
listed global depositary receipts on the LSE's main market.
Regulatory changes in the UK
There have been concerns that two well-meaning regulatory
changes would have the unintended consequence of negatively
impacting the London market. One area of concern has been that
the Markets in Financial Instruments Directive (Mifid) II would
negatively impact the visibility of and market liquidity of
small-cap companies, potentially making it less attractive for
small companies to go public in the first place. The other area
of focus has been the introduction last year by the UK
Financial Conduct Authority of new provisions on the
availability of information in the UK equity main market IPO
process. Those changes were intended to improve the range,
quality and timeliness of information made available to the
market and, in particular, to restore the centrality of the
registration document or prospectus in the overall process in
order to boost investor confidence. At the same time, there
were concerns that the changes could add to costs or
timetables. In practice, the evidence so far has been that
while the changes have done little to achieve their stated
intentions, equally they have not proved a concern for new
issuers.
In contrast, the recently refreshed UK Corporate Governance
Code – which has crucially retained the flexible
'comply or explain' regime – continues to appeal to
issuers from across the EMEA regime attracted by the high, but
not rigid, standards. While London has sought to innovate in
IPO regulation, experience has shown that the real benefits
have come when the focus has been on enhancing its existing
strengths. Nevertheless, while its corporate governance
environment is admired and the cultural openness of the UK
makes it a natural home for many EMEA issuers, the smaller pool
of capital, as compared to the US and China, is likely to
continue to leave it behind in the contest for the largest and
most mobile mega-IPOs.
Chinese game changer?
In November 2018, President Xi Jinping of China announced
plans for a Nasdaq-style technology board on the Shanghai Stock
Exchange, intended to foster the growth of mainland Chinese
technology companies. The new science and technology innovation
board – the STAR Market – focuses on new
high-tech and strategic emerging industries that are aligned
with national strategies, and is intended to provide an
attractive listing alternative to overseas bourses.
The STAR Market has boosted its competitive credentials by
allowing companies with WVR structures to list, in addition to
certain pre-revenue companies. It is likely that this move is
designed to stem the flow of Chinese companies choosing to list
in the US due to their more flexible approach to corporate
structures. This also puts it in direct competition with Hong
Kong, which only recently changed its listing rules to
accommodate demands for a more liberal regime to attract new
technology companies. Countering concerns that the new board
could remain subject to the same issues as its domestic
predecessors, namely an opaque approvals process and uncertain
timing, the board is, for the first time, operating a
registration-based system that replaces the requirement for
companies to go through an approval process with the
regulator.
While there will always be an appetite to tap foreign
investor pools, China's new board is set to encourage more
companies to list domestically, and we could begin to see a
real shake-up in the market when it comes to Chinese IPOs
– particularly given the positive sentiment towards
Hong Kong's regulatory changes last year. In just a few months
since the board began accepting applications, it has attracted
over 140. The board went live on July 22 2019, with an initial
25 listed companies, all of which experienced a significant
surge in their share price on day one.
China currently dominates cross-border technology IPOs, with
eight of the 12 recorded in the first half of 2019 domiciled
there – four of which were listed on the HKEx, three
on Nasdaq, and one on the NYSE. This trend is set to continue
and the STAR Market is gearing up to directly challenge the
HKEx, NYSE and Nasdaq as the listing venue of choice for new
technology companies, particularly those emerging out of China.
However so far, HKEx, NYSE and Nasdaq have remained attractive
to many issuers for their regulatory regimes that are
considered more market-driven and free from direct government
intervention.
Mega IPOs moving east?
It is unlikely that the relative listing merits of the US
bourses and those in China and its territories can be viewed in
isolation from the ongoing trade dispute and China's ambitions
on the global stage, highlighted most overtly by the
championing of its Belt and Road Initiative. This mammoth
project, involving the development of physical infrastructure
across continents, complements its moves in the capital markets
space to capture a greater share of the global flow of
capital.
While we can't yet say what a secondary listing by Alibaba
in Hong Kong might ultimately mean for the company's commitment
to its NYSE listing, the Chinese chipmaker Semiconductor
Manufacturing International Corp. has already delisted its
American depositary receipts from the NYSE. Citing the cost and
low trading volumes for the move, this comes at a time of
heightened tension as the US focuses on protecting its
technology sector from what it labels Chinese
misappropriation.
One potential IPO that has been talked about for a while is
that of the Chinese electronic payment provider Ant Financial,
an affiliate of Alibaba. This blockbuster IPO will be a notable
coup for whichever bourse is able to attract the listing.
Despite its parent listing in New York, since the HKEx changed
its rules to allow dual class shares, there have been
suggestions that it could be the preferred destination for the
company. But with Shanghai's new STAR Market seemingly
tailor-made for it, the final destination for any IPO remains
very much a guessing game.
Perhaps giving Shanghai an extra boost is the fact that
China's A-shares (the name given to Chinese company shares
trading on domestic exchanges) generally trade at a premium to
so-called H-shares (the shares of mainland Chinese companies
that trade on the HKEx) due to increased demand for
domestically-listed stocks. As a result, a company choosing to
list on an exchange in mainland China is likely to receive a
better valuation that on the HKEx, which may be another factor
that weighs on the final decision.
Regional competition in Asia Pacific
In addition to the challenges provided by mainland Chinese
exchanges, the Singapore Stock Exchange (SGX), another of Hong
Kong's regional rivals, has also taken steps to become more
competitive. In 2012 the SGX was unsuccessful in attracting
Manchester United to list on the exchange. At the time, the SGX
prioritised investor protection, maintaining the corporate
governance principle of 'one share, one vote', which
contributed to the exchange losing the listing. The US-owned
club listed on the NYSE with a dual class share structure.
After two rounds of public consultations, the SGX revised
its listing rules to permit dual class shares in June 2018,
although it is yet to see its first listing under the new
regime. Given the continuing concerns of the investor community
around such structures and their impact on voting power and
control, the SGX's decision, coming just two months after the
HKEx implemented its listing regime changes, appears to
implicitly acknowledge that it was falling behind its
international competitors and needed to evolve, even at the
expense of governance standards.
However, in a rather downbeat assessment of the changes, the
Asian Corporate Governance Association said the move "damages
regulatory credibility and contradicts emphasis on investor
stewardship". While investors and governance bodies may
continue to pressure legislators, regulators and exchanges to
address such disparate voting structures, without a coordinated
global approach it is unclear whether it will be possible to
reconcile the goal of one share, one vote with the competitive
challenges faced by the top global exchanges in securing the
listings of the most attractive issuers.
The number of SGX-listed companies is, in fact, shrinking,
with some choosing to delist and go private. The
Singapore-based company Osim delisted from the Singapore
exchange in 2016 citing rising compliance costs and the belief
that it was undervalued due to low liquidity on the exchange.
It then applied to re-list in Hong Kong, although its
application subsequently lapsed.
Another Singaporean success story was the gaming company
Razer. Despite backing from the Singapore sovereign wealth fund
GIC, in 2017 it decided to list in Hong Kong due to its close
connection to the Chinese market and the depth of liquidity.
More recently, PropertyGuru announced plans to list on the ASX
rather than in its home market, although it subsequently pulled
its listing. The gravitation towards alternative exchanges
starkly illustrates the challenge the SGX faces to remain
competitive and attract homegrown businesses to list
domestically, and the struggle to remain relevant in the market
for listings.
Tough to topple the US
Although the first quarter of 2019 saw North America bear
the brunt of the US federal government shutdown and the
Securities and Exchange Commission's subsequent backlog and
delay in activity on the IPO market, Nasdaq was still the
second leading cross-border IPO destination, having raised $2.2
billion from 24 public debuts during the first half of the year
by companies based in China, Israel, Singapore, France, Hong
Kong, Cyprus and Colombia. On the domestic front US exchanges
were dominant, with the NYSE raising $18.9 billion, up 16%, and
Nasdaq $13.1 billion, up 12% compared to the same period last
year. Despite the continued trade war between the US and China,
there has still been considerable demand from Chinese companies
to list on US exchanges, with 16 listings raising over $2
billion across Nasdaq and the NYSE.
Listing venue arbitrage
When it comes to enhancing the IPO process, exchanges are,
however, somewhat restricted in their reforms by regulation, so
there is only so much the exchanges can do. In Australia and
the US, the Securities Acts drive the requirements so exchanges
can't change the process too much. And when everyone can
remember the global financial crisis, regulators won't win fans
by relaxing regulation. Public equity markets are still one of
the most efficient ways of allocating capital in modern
society, but they need to be optimised without losing investor
protections.
Companies have been playing a game of listing venue
arbitrage by seeking out bourses to list on that are willing to
accommodate their specific needs and corporate governance
requirements. As Asian exchanges play catch-up and with
US-China trade tensions added to the mix, there could be more
developments to come as companies navigate the fine line
between economic rationale and political expediency.
We don't know yet what the full repercussions of the
strained US-China relationship will be, but we have certainly
seen signs that the debate is playing out on the world's major
stock exchanges. For all their efforts to remain competitive,
in the final analysis, there may be other extraneous factors at
play that will determine where certain companies ultimately
choose to list.
It is undeniable that the US exchanges will remain an
attractive proposition for technology companies given the depth
of the US capital markets and sector expertise in the
investment banks and among investors. With the listing rule
changes that have taken place in Hong Kong and the development
of Shanghai's new STAR Market, the arguments for listing
overseas in the US or elsewhere may become much weaker. As
these Asian bourses grow and develop, they could well become
the more natural fit for homegrown new technology companies in
China and provide the next generation of unicorns with a strong
incentive to list much closer to home.
With stock exchanges proactively looking to attract
lucrative listings, there will be pressure for each exchange to
adopt (or maintain) flexible listing standards with respect to
voting structures. While typically the reasons for a
cross-border listing are driven by liquidity or other market
conditions, governance considerations can also be an important
factor that the exchanges must balance when contemplating
changes to their listing requirements.
While commentators may view modifications of voting
restrictions by the Hong Kong and Singapore exchanges as a race
to the bottom, there is increasing competition among exchanges
for key listings of large internationally-oriented companies
that originate from jurisdictions which permit disproportionate
voting structures and, absent regulatory changes or strong
pushback from the investment community, those forces will
likely continue to have implications for the evolution of
listing standards.
As listing rules and bourses evolve we are seeing the
beginning of a revolution in the options available to companies
and where they choose to list. The signs are that the
phenomenal growth of the IPO market in Asia Pacific will likely
continue, and the Hong Kong, Singapore, Shanghai and Shenzen
exchanges will together develop to become key competitors to
London and New York over the coming years.
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Chris Bartoli
Partner
Baker McKenzie
Chicago |
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Ivy Wong
Partner
Baker McKenzie
Hong Kong |
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Nick O'Donnell
Partner
Baker McKenzie
London |