Bitter about the high cost of taking a company public in the United States? Maybe it’s time you looked into an IPO overseas. In 2005, Mayfield Fund took one of its companies public in England, New Enterprise Associates did the same in India and Oak Investment Partners followed suit in the Netherlands.
A survey by Venture Capital Journal, a sister publication, shows that a growing number of firms are looking abroad to go IPO. Nearly half of the 30 respondents to the poll of roughly 50 VC and private equity firms had at least one portfolio company go public on a foreign exchange last year. And of that group, five firms had multiple portfolio companies go public abroad-3i Group, Apax Partners, DCM-Doll Capital Management, Lombard Capital and Warburg Pincus.
Overall, the firms surveyed said that 33 of their portfolio companies conducted foreign IPOs last year, compared to 45 of their portfolio companies that went public on U.S. exchanges.
What’s behind the growing interest in foreign IPOs? VCs say the principal reason is the high cost of going public in the United States, especially since the passage of corporate reform law Sarbanes-Oxley (SOX) in 2002.
At the same time, foreign exchanges are maturing and becoming more liquid as more and more companies conduct business on a global basis – giving venture-backed companies yet another exit option besides M&A. Of course, going public in Amsterdam isn’t exactly on par with going public on the NYSE, so while VCs are happy to have more exit options, they’re less than pleased at the current state of affairs for U.S. markets.
“We’re seeing a trend that’s very depressing for VCs,” says Anthony Sun, managing partner of Venrock Associates in Menlo Park, Calif. “With no IPO window open five years after the dot-com bubble, we’re being relegated to mergers and acquisitions, where returns are an order [of magnitude] less than VC-backed IPOs.”
Sun says compliance with SOX places “too big a burden on a young company.” He delivered his message personally to SEC Chairman Chris Cox in January, telling the new chairman that there is no way that VC-backed companies can comply with the SOX accounting requirements.
Another SOX basher is Draper Fisher Jurvetson founder Tim Draper. He says the burden of SOX compliance and the cost of expensing stock options is driving more firms to look at foreign exchanges. “All of [DFJ’s] nearly public, global companies are considering going public offshore,” he says. “We had a big discussion of it [recently] with three nearly public companies. One said, I will never go public [in the U.S.].’ One said, We are going public in London to avoid [SOX].’ And a third said they were considering a public offering overseas. This from three companies headquartered in the heart of America. Sarbanes-Oxley had the best of intentions, but the worst of outcomes.”
SOX is just one of a lengthy list of issues making startups look for alternatives to going public in the United States, says Bon French, CEO of Adams Street Partners, a fund of funds based in Chicago.
“After polling our group, I would say that with the increased frictions of going public in the U.S.-Sarbanes-Oxley, stock options expensing, less analyst coverage, regulation FD, the difficulty of recruiting good, independent directors, etc.-more of our portfolio companies are considering M&A exits as the preferred route, even at a lower price.”
French notes, however, that “a lot of other financing alternatives are being considered for raising money” outside of a U.S. IPO. In addition to looking into going public in Toronto, London or other foreign exchanges, “they’re looking at the possibility of raising money from crossover funds, PIPEs, second-lien loans and other kinds of structured finance products,” he says.
Lure of distant lands
The foreign exchange that appears to have benefited most from firms looking for an alternative to U.S. exchanges is the Alternative Investment Market (AIM), which is part of the London Stock Exchange. That’s surprising, given that the AIM is highly regulated. Also, the U.K.’s Financial Services Authority (FSA) registers and regulates all activities of its private equity industry. So why is AIM rising in the minds of VCs?
It’s marketing, pure and simple, says Michael Brown, a managing director at Battery Ventures in Boston. “The folks from AIM are on a road show in the United States as we’re speaking,” he says, “and they’re telling us to come [to London] where there is less regulation and where corporation governance and oversight is not so strict as it is under Sarbanes-Oxley.”
Apart from AIM’s marketing effort, Brown suggests three reasons why more companies are considering going public abroad: they’re based in Europe, not large enough to list on the Nasdaq, or they can’t secure late-stage funding in the United States. For example, PolyFuel, which went public on AIM last year, “said that they did an AIM IPO by way of raising a late-stage round that they couldn’t raise in the U.S.,” Brown says.
The larger issue behind the growth of foreign exchanges is the globalization of venture capital and private equity. More and more U.S. firms are deploying people and money overseas. “And as those investments mature, by default, you’ll see more and more international IPOs over the next three to five years,” Brown predicts.
For example, Battery has an investment in Tejas Networks, a communications equipment designer and manufacturer based in India. At some point over the next couple of years, given the growth of the Indian stock market, “it may make sense for us to IPO in India,” rather than taking the traditional route of filing an F-1 and selling ADRs on the NYSE or Nasdaq,” says Brown. The Bombay Stock Exchange, “is on my agenda for 2006” for the same reasons, says Sun of Venrock.
Location, location …
Shahan Soghikian, a managing partner at Panorama Capital (the venture group that spun out of JP Morgan Partners), agrees that the increase in foreign IPOs traces its roots to more venture firms doing business overseas.
“The fact that a firm like DCM had a lot of IPOs in Japan reflects their investments there,” he says. “Similarly, 3i is predominantly a European firm, so I’d expect to see them exiting on local exchanges. European exchanges have become more attractive, more liquid. When I was based in our London offices in the mid-90s, every European firm was trying to figure out how to IPO on the Nasdaq, but that could be shifting now.”
That trend for companies that aren’t based in the United States but that have backing from U.S.-based VCs is already well pronounced at firms like Walden International, which last year saw two of its portfolio companies go public in the United States and one on the Taiwan Stock Exchange.
Walden has been quietly having success with foreign market IPOs for years, beginning with MediaLink, a VoIP company that went public on the Singapore Stock Exchange in 1999, says Kee Lock Chua, a managing director in Walden’s Singapore office and founder of MediaLink.
Chua says that the math is simply not there to allow smaller non-U.S.-based companies to go public on the Nasdaq. “Mid-cap companies are driven to other markets by those costs,” he says.
At the same time, stock exchanges in foreign markets where Walden operates continue to grow stronger. “Taiwan, Singapore, Hong Kong, even Korea are all alternatives to the Nasdaq and have good liquidity,” Chua says.
Also, because local companies are better known by investors and analysts in their home countries, “it makes more sense for a Singapore firm to list on the SGX and not the HKSE,” Chua notes. “Home markets are always the best.”
This story originally appeared in the March 2006 issue of Venture Capital Journal.