International IPOs and Investing
Initial public offerings — or IPOs — tend to generate a lot of excitement among investors. For example, Snap Inc.’s (SNAP) IPO in early-2017 generated a lot of interest due to the popularity of the Snapchat app. 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.
In this article, we will look at international IPOs, how to find them, and how to invest in them, as well as some important considerations for investors.
What Is an IPO?
Initial public offerings — also known as IPOs — 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 with the price determining the company’s value.
The most famous IPOs are U.S.-based tech companies, such as Google, Facebook, and Snap, but there are all kinds of companies that undergo an IPO around the world. 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 in private business, such as venture capital firms.
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 in nature but are required reading for potential investors. In the U.S., these documents are filed with the U.S. Securities & 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
International IPOs can be found in many different places, ranging from the traditional news media (for popular issues) to IPO-specific websites for 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 new international IPOs before diving deeper into 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 on a quarterly basis — including any new additions — which makes them a good source for a list of large and popular IPOs occurring around the world.
Investors may require an international brokerage account to invest in some foreign IPOs depending on where they are listed. Many large brokers, such as TradeStation and InternationalBrokers, 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 use any U.S. brokerage account.
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 May 2017, the fund has a 0.8 percent expense ratio and 1.45 percent distribution yield with roughly 58 percent exposure to Europe, 38 percent exposure to the Asia-Pacific, and 4.3 percent exposure to the Americas. The largest percentage of assets are concentrated in the United Kingdom (19 percent), China (19 percent), and Japan (14 percent), while the largest holdings include companies like WorldPay (6 percent), Japan Post Holdings (4.6 percent), and Auto Trader Group (4 percent). In terms of performance, the fund outperformed the MSCI ACWI ex-US Index during Q1’17 but has underperformed since inception.
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 a slightly lower expense ratio of 0.7 percent but has similarly underperformed its benchmark index.
International investors should keep in mind that IPOs and international IPOs carry many unique risks, which should be carefully considered before investing, including:
- 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 investment decisions off of.
- 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 on a regular basis.
The Bottom Line
Initial public offerings — or IPOs — tend to generate a lot of excitement among investors. While most investors are focused on domestic IPOs, there are many international IPOs that investors may want to consider. Investors have many different options for finding and investing in these IPOs, but it’s important to consider the risk factors involved beforehand.