More than three-quarters of investment bankers surveyed by BDO USA indicated that Chinese accounting scandals have led them to increase their due diligence when vetting China-based offerings.
Forty-four percent of the investment bankers surveyed by BDO predict a decrease in the number of China-based businesses conducting offerings on U.S. exchanges in 2012. When asked for a reason for the decrease, 57 percent of thee respondents cited the widely publicized accounting scandals at numerous Chinese businesses as curbing the U.S. appetite for these offerings, while 31 percent predicted that Chinese businesses would seek to avoid U.S. regulations. Twelve percent of the respondents cited the increased access to capital in Asia Pacific exchanges as the reason.
When asked where they have expanded their due diligence efforts regarding potential China-based offerings, 56 percent of the investment bankers surveyed cited internal controls over financial reporting, while only 23 percent mentioned increased scrutiny of corporate governance structure. Lesser amounts cited business risks (14 percent) and product/sales trends (6 percent).
“As economic concerns spread to virtually every country around the world, it isn’t surprising that the capital markets community is forecasting a more moderate migration of foreign-based IPOs to U.S. exchanges in 2012,” said Lee Graul, a partner in the Capital Markets Practice of BDO USA, in a statement. “However, the bankers’ concerns specific to Chinese offerings are very revealing. The prominent accounting scandals have clearly impacted the U.S. view of Chinese businesses, and investment banks are enhancing their risk assessment processes for considering these offerings.”
The study found that just 36 percent of the 100 capital markets executives surveyed at leading investment banks believed the percentage of foreign-based IPOs on U.S. exchanges would increase in the coming year. Thirty-seven percent said they believe the percentage would remain flat and 27 percent predicted a decrease in foreign-based offerings. The percentage predicting an increase is a major drop from 2011 (59 percent) and 2010 (51 percent), when a majority of bankers predicted more foreign offerings on U.S. exchanges.
Asia is still the most often cited geographic location for spawning foreign-based IPOs on U.S. exchanges, at 49 percent, but not as popular as in 2011, when the proportion was 66 percent, or 2010, when it was 73 percent. Latin America was the only other region receiving serious consideration as the 2012 leader for foreign offerings, at 24 percent.
IPOs on U.S. exchanges represented more than a quarter of total global IPO proceeds in 2011, a considerable increase from 2010. When asked the chief factor driving this trend, the capital markets community identified pricings of large private equity-backed IPOs on U.S. exchanges (36 percent), a slowdown in international IPO activity (34 percent) and foreign businesses listing on U.S. exchanges (30 percent).
Moving forward, 41 percent of the investment bankers surveyed said they believe the U.S. percentage of global proceeds would increase further in 2012, compared to 40 percent that see it remaining relatively flat and 19 percent that predict a decrease in the U.S. share of global IPO proceeds.
In terms of IPOs taking place on foreign exchanges, 39 percent of investment bankers believe Hong Kong will be the most popular in 2012. Euronext (12 percent), London (12 percent) and Shanghai (11 percent) are the only other exchanges receiving double-digit support.
