International IPOs and Investing
Initial public offerings—often simply called IPOs—tend to generate a lot of excitement among investors. For example, Snap Inc.’s IPO (SNAP) in early 2017 generated a lot of interest due to the popularity of the Snapchat app. Throughout 2019, more popular companies like Beyond Meat, Uber, and Lyft followed suit with their IPOs.
Most investors tend to focus on domestic IPOs because they often know the brands associated with them, but those focused exclusively on the United States may be missing opportunities in international markets. Let's take a look at international IPOs, how to find them, how to invest in them, and some important considerations for potential investors.
What Is an IPO?
Initial public offerings occur when a company sells shares to the public for the first time. In other words, the process transforms a privately-held company into a publicly-traded company. Companies pursue an IPO to raise capital, pay off existing investors, and to make access to capital easier in the future. After the IPO, the shares trade freely in the open market between investors. At that point, the price of the shares and the number of shares available determine the company’s value.
The most famous IPOs are U.S.-based tech companies, such as Google, Facebook, and Uber, but there are all kinds of companies around the world that undergo an IPO process. For example, biotechnology companies often require significant capital to bring new products to market, which makes an IPO an attractive prospect for them. In contrast, many tech companies undergo an IPO to pay off existing investors, such as venture capital firms, who invested in the company while it was still private.
Companies that undergo an IPO are often required to file a prospectus, which details the company’s operations and recent financial history. These documents are lengthy, but they're required reading for potential investors. In the U.S., these documents are filed with the U.S. Securities and Exchange Commission (SEC) under Form S-1 or, in amended form, in S-1/A filings, but they may appear under different names in different countries.
Investing in International IPOs
News about international IPOs can be found in many different places, ranging from the traditional news media (for popular issues) to IPO-specific websites that offer a comprehensive list.
NASDAQ provides the most popular list of initial public offerings, which includes many international IPOs, as well as IPO performance metrics. Similarly, companies like Reuters provide IPO-specific news covering all countries around the world. International investors may want to keep an eye on these news outlets as a potential source for discovering new international IPOs, but they should dive deeper into the details of each company before making an investment decision.
Investors willing to invest after the offering occurs may also look at exchange-traded funds (ETFs) and mutual funds focused on international IPOs. These funds are required to report their holdings, including any new additions, every quarter. That makes them a good source for a list of large and popular IPOs occurring around the world.
Investors may need an international brokerage account to invest directly in some foreign IPOs, depending on where they are listed. Many large brokers, such as TradeStation and Interactive Brokers, offer access to hundreds of different markets. In other cases, securities may be dual-listed in the United States or use American Depositary Receipts (ADRs), which enable investors to buy shares through most U.S. brokerage accounts.
International IPO Funds
The easiest way to invest in international IPOs is through ETFs and mutual funds, which provide access to hundreds of companies in a single security.
The Renaissance International IPO ETF (NYSE: IPOS) is the most popular option for investors looking for exposure to non-U.S. newly public companies ahead of their inclusion in core equity portfolios. Using the Renaissance International IPO Index as its underlying index, the fund includes the most economically significant newly public companies. Sizable IPOs are added on a fast entry basis and the rest are added during quarterly reviews. Companies that have been public for two years are removed at the next quarterly review.
As of Dec. 31, 2020, the fund had a 0.80% expense ratio and 4.39% SEC yield with roughly 60% exposure to Asia, 37% exposure to Europe, and 3% in the Americas. The largest percentage of assets are concentrated in China (38.5%), Japan (11.3%), and the United Kingdom (6.0%), while the largest holdings include companies like SoftBank Corp (9.31%), Nexi (5.01%) and China Feihe (4.75%). In terms of performance, the fund was up 51.49% year-to-date on Dec. 31, 2020. In that same time, the S&P 500 gained 16.26%.
Another popular option is the First Trust International IPO ETF (NYSE: FPXI), which is a market capitalization-weighted portfolio that measures the performance of the top 50 non-U.S. companies, including companies domiciled in emerging markets, ranked quarterly using the IPOX Global Composite Index. The fund has an expense ratio of 0.7%.
International investors should keep in mind that IPOs and international IPOs carry many unique risks, which should be carefully considered before investing:
- Lack of information: Newly public companies lack a long track record and are often relatively new corporations compared to blue-chip stocks. This means that investors have less information from which to base their judgments.
- International risk: International companies may have an inherently higher risk than domestic companies since they entail additional political risks and currency risks, as well as potential taxation concerns for dividends and other income.
- Less diversification: Many international IPO ETFs and mutual funds are concentrated in specific countries, industries, or companies depending on the way that they’re constructed, which means that they may offer limited diversification.
- High expenses: International IPO ETFs often have higher expense ratios than traditional index funds due to the active nature of identifying initial public offerings and keeping the portfolio rebalanced regularly.