The New Competition For Listings

Some of the world’s biggest stock exchanges are feeling left out as local corporates opt to go abroad for their IPOs.

When the iconic German footwear manufacturer Birkenstock decided to go public in October, it didn’t choose the Frankfurt bourse or any of the six local exchanges. Instead, the 250-year-old brand, whose signature sandal appeared in the recent blockbuster Barbie movie, debuted on the New York Stock Exchange (NYSE).

“Some say, ‘Birkenstock is having a moment,’” CEO Oliver Reichert wrote to potential shareholders ahead of the initial public offering (IPO). “I always reply then, ‘This moment has lasted for 250 years, and it will continue to last.’”

A month earlier, UK-based Arm also enjoyed a moment. The SoftBank Group-owned chip designer decided to list on the Nasdaq instead of the London Stock Exchange (LSE).

Both Birkenstock’s and Arm’s listings underscore a trend, close observers tell Global Finance. Major stock exchanges are struggling to keep homegrown companies onshore. According to consultant EY, cross-border IPOs on US exchanges, as a percentage of total US IPOs, have climbed steadily from 26% in 2021 to 39% in 2022. Today, the percentage of total US IPOs hailing from Europe, China or elsewhere comes to more than half: 52%.

Nasdaq and the NYSE get the lion’s share of listings. Companies from across the globe choose these hotspots to go public, and they tend to be high-profile entities seeking favorable valuations, increased liquidity and a more diverse investor base, EY noted. The trend is also evident in Asia-Pacific, where the largest and best-established venues are not always getting the business. Indonesia Stock Exchange outpaced China and surpassed the Hong Kong Exchanges and Clearing (HKEX), earlier this year in the global stock exchange rankings by volume for the first time in 20 years.

That was “a surprising twist,” says Thomas Smale, CEO of advisory firm FE International. “It’s akin to an underdog occasionally besting the seasoned player, underscoring the ever-evolving nature of the financial arena.” Some emerging exchanges are getting creative, “offering enticing listing incentives reminiscent of aggressive market discounts to attract potential listings.”

Stock exchanges offer varying flavors of pomp, so to speak. “While the US indulges in grand bell-ringing celebrations, the LSE takes a more subdued approach with its ‘Market Open’ ceremonies, leveraging them for targeted visibility,” Smale notes.

Nasdaq reportedly courted Arm with a package worth $50 million. The company’s shares gained nearly 25% in what was touted as the biggest IPO since late 2021. “As for HKEX, it’s not about the pomp; it’s the strategic positioning as a bridge to the thriving Asian markets that stands out,” Smale says.

Stay Or Go?

The Frankfurt Stock Exchange is still one of the world’s largest trading facilities, but in February, it lost its biggest company, gas engineer Linde. The firm’s Frankfurt exit underscored the benchmark bourse’s struggles presenting itself as a global destination for major corporates. By March 2, Linde began trading on the NYSE. It could have listed on both, as companies sometimes do, but dual-listed stocks carry certain drawbacks, including initial and ongoing expenses. Moreover, the process demands increased time and attention from management.

Frankfurt’s fortunes haven’t improved since February. Days before Birkenstock went public, Renk Group postponed its planned IPO in Frankfurt, just hours before the German defense company was expected to start trading, citing market conditions. The excuse was similar to the one WE Soda gave in June when it blamed “extreme investor caution in London” in canceling its planned $7.5 billion listing. It would have been the largest IPO in the UK this year.

In the US, it’s less common to see high-profile companies suddenly scrap plans to go public. “There are a variety of often-cited business and financial factors, such as better liquidity in the US markets and more attractive valuations spurred by a larger pool of capital,” notes Paul Weiss partner Christodoulos Kaoutzanis. US legal rules permit companies to test the waters with institutional investors prior to an IPO. Also, most of the regulatory review process is conducted through confidential filings.

“Meanwhile, with the separation of the Euronext and the LSE systems in the wake of Brexit, investors appear to face logistical hurdles in trading a certain security at once across all of the largest European stock exchanges,” he says. “As a result, liquidity is lower in these markets than in the US, which in turn deters both issuers and investors.”

IPOs Migrate to Emerging Markets

As Indonesia Stock Exchange’s success indicates, some of the world’s smaller exchanges are making significant strides, especially in emerging markets, which account for 77% of global IPOs, according to EY.

Smale, FE International: Anticipate a landscape where new players challenge the established order.

Emerging markets also made up 75% of IPO value from January to September, embracing new entrants to the active IPO arena such as Turkey and Romania. The year-to-date value of IPO deals on Turkey’s Borsa Istanbul hit $2.3 billion: more than double the value of deals on the LSE. And the Bucharest Stock Exchange welcomed Romanian utility company Hidroelectrica in July with a deal valued at $2 billion, one of the largest IPOs of 2023 thus far.

To draw a mega-IPO like Arm, says says Ringo Choi, EY’s Asia-Pacific IPO leader, “there are many factors, like IPO pricing, post-IPO liquidity, market research support and also sometimes the market penetration needs of the IPO candidate.”

Malaysia, India, Japan, and Italy are also contributing to the growth of smaller IPOs. This is in stark contrast to Hong Kong, which for years was considered a hotbed of IPO activity. Not anymore. In 2023, just 3% of global IPOs chose to list in Hong Kong, generating just $3.2 billion in proceeds for the exchange, according to EY. “The IPO market in Mainland China is experiencing a temporary tightening,” Choi notes. Companies wishing to go public are expected to undergo a more rigorous vetting process and lengthier registration procedure as regulators seek to curb the pace of IPOs to balance financing and investment.

Owing to recent poor valuations, numerous pending blockbuster IPOs will likely go on hold until conditions improve, Choi predicts. Hong Kong investors “retain caution over economic prospects and are refraining from making major investment decisions until the fourth quarter or early 2024.”

The decisions underscore how challenging the market has become for Chinese companies that want to go public on international stock exchanges. The Beijing Stock Exchange is actively supporting the listings of innovative small and midsize enterprises, Choi explains, while HKEX is taking steps to bolster its drawing power. 

In September, the HKEX designated the Saudi Exchange as an accepted market for secondary Hong Kong listings. This builds on a February memorandum between HKEX and Saudi Tadawul Group in which they agreed to collaborate on cross-border listings, paving the way for blockbuster listings on the Hong Kong bourse. And in October, the HKEX announced a new blockchain initiative which it called “the next phase of growth for international participation in Mainland China’s equity markets.”

“Yes, stock exchanges worldwide are increasingly adopting blockchain technology for various purposes, including the digitization of assets, streamlining trading processes, enhancing transparency and reducing costs,” Choi says, citing Nasdaq, the NYSE, the Australian Securities Exchange (ASX), and the Singapore Exchange (SGX).

Will Exchanges Go Extinct?

Currently, there’s a lull in IPO activity; in the first nine months of 2023, global IPO volumes fell 5%, with proceeds down 32% year-over-year, EY reported. But investors shouldn’t expect that to translate into a dramatic shift away from stock exchanges anytime soon, Kaoutzanis argues. “Although it’s hard to predict the future, the stock market seems to have held up well despite the emergence of new platforms and technologies for wealth generation and investment,” he says. “It is more likely that the stock market will evolve to integrate such technologies, such as blockchain, rather than going the way of the dinosaurs.”

Smale agrees, citing the ever-changing tides of geopolitics and rapid technological advancements, which suggest a potential shift on the horizon. “While it’s not necessarily about the decline of these financial behemoths, it’s essential to recognize the emerging contenders,” he says. “As we navigate the next decade, anticipate a landscape where new players challenge the established order in the financial arena.”